The Financial Express

Retail banking -- A way of diversifying banking portfolios

Retail banking -- A way of diversifying banking portfolios

The banking industry in a country is considered the lifeline of the economy, playing an influential role in initiating and supporting economic growth, especially, in developing countries like Bangladesh. Banking in Bangladesh has already passed a long period and the industry has witnessed many positive aspects like capital adequacy, asset quality and growth of businesses. Although in between, the industry has achieved new heights, there are many more things to do for becoming a vibrant industry. Reviewing the local and global trend of banking, retail banking appears to be one of the key performance parameter in future. Retail banking, also known as consumer banking, refers to the offering of banking services to retail customers instead of institutional customers, such as companies, corporations and/or financial institutions. 

It is true, Bangladeshi banking is confined to large classified loans, slow automation, fewer retail banking solutions, low access to internet banking and concentration of banking limits. With the increasing trend of internet penetration together with the young people's preference for technology, our banking will find it difficult to survive given the limited coverage of various banking products. The entire banking system has changed to digital coverage and customer convenience. As a result, it is important to tap the opportunities of retail banking by the commercial banks in Bangladesh. The growing network of banks and increasing use of digital technology will also contribute to the growth of retail lending activities.

Nevertheless, banks in Bangladesh are still in the traditional mode. Here, corporate banking and small and medium enterprises (SMEs) were getting more focus ignoring the retail sector. But with retail banking, it can reach a wide variety of customers across the country. It can be said with confidence that retail banking will be the main driver of growth for the country's banking sector in the near future as lenders' dependency on corporate banking is waning due to rising of non-performing loans. Retail banking, in contrast, has much lower NPLs than corporate banking.

In commercial banking, a single corporate customer can cost a huge amount in impairments. Regulators are also making banks hold more capital, limiting lending (single borrower exposure limit i.e., bank can extend credit facilities up to 35 per cent of its capital including funded and non-funded facilities to a single customer; in case of RMG which is 50 per cent.

It is pertinent to mention that retail banking is the most visible face of banking for the general public. These services are typically offered at the physical branches and at the omnipresent ATMs. The delivery channel for retail banking is now no longer restricted to branches and ATMs but is also made available through telephone and the internet. In fact, some retail banks in the West operate solely via the internet and do not have facilities to serve customers at physical outlets. Generally, the banks that focus purely on retail clientele are relatively few and retail banking activities are generally conducted by separate divisions within banks.

Banks in Bangladesh currently do their banking on a booming retail business as the household debt in Bangladesh as a percentage of (nominal) GDP is one of the lowest in this continent. US-based Boston Consulting Group (BCG) in its report on Bangladesh has reinforced the fast growing middle and affluent class in Bangladesh and the rise of consumerism. Bangladesh Institute of Development Studies (BIDS) claimed that by 2030, 33 per cent of our population will belong to the middle-class. Gross domestic product (GDP) at purchasing power parity (PPP) is expected to grow to USD 1,324 billion in 2030 and USD 3,064 billion by 2050. From this we can assume that the nature of their demand will shift, they can afford more to buy newer things and more importantly, they would demand better financing or banking solutions.

Accordingly, banks in Bangladesh should adopt customer-centric business model to cater for diverse groups of people through customisation. The big metropolitan areas of the country are always treated as the key markets for retail banking but now it is high time to extend it to provide all key retail banking services to even rural areas.

Bringing technology-driven solutions, modernisation of banking software and the use of contents in digital channels are the primary concerns to render banking more efficient and divesified. Features like mobile app-based banking, electronic payment and secure online transactions have become essential rather than luxury. It has become challenging for banks to retain customers and attract new ones, deliver new products and provide steady customer-centric services while meeting the regulatory requirements. Without automation of critical business processes, it is not possible to ensure seamless customer service. Anyone and everyone should be a target customer of retail banking. Banks should bring every citizen under the banking ecosystem through agent banking, school banking, '10 Tk. Account' for root level farmers in order to move towards financial inclusion.

As retail banking ensures steady flow of deposits, which plays an important role in lending and other investments, it is also a tool for banks to maintain ADR. This is done through offering diverse savings schemes to clients belonging to various income groups.

However, one of the major constraints for banks is 'product scarcity'. Banks are sometimes helpless when the clients ask for any tailor-made solution. However, there is no avenue other than retail banking to ensure sustainable profit in the days to come as banks will have to depend on the window for both deposit collection and loan disbursement. Efficient and skilled manpower are also essential to remain competitive in retail banking. Retail banking helps banks to lower the cost of deposit and operations. It also reduces the risks stemming from dependency on large loans. Banks must shift the gear towards retail banking since it helps achieve a healthy lending portfolio. In today's competitive world, banks have to be proactive in their approach.

Tapash Paul is Head of Risk Management Division, Mercantile Bank Ltd.

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