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Nn 0y nn Based on the information given in the case, evaluate the state of retail banking in India.

One of the most prominent developments in Indian banking in the recent past has been the rapid growth of the retail loan portfolios of private sector commercial banks. The growth posted by some of the private sector banks has been such (a near doubling of retail credit in around two years which shows an annual rate of growth of around 35 per cent) as to overshadow the more modest attainments on this front by other banksparticularly the public sector banks. It has also created the perception that overall economic conditions have so changed that a major shift in business strategy (such as the dominant focus on retail banking as against wholesale banking) is quite inevitable and the future lies only in retail banking expansion. The state of retail banking in India, retail credit growth of nationalized banks does pale in comparison with that of the private bank majors. Retail credit increased only from 10 per cent of nationalized banks' total credit in March 2000 to around 15 per cent of total credit in March 2007. Retail credit forms around 25 per cent of the total credit. Total bank credit as of June 2007 is Rs 19,00,000crore. This means that just two banks, ICICI Bank and HDFC Bank, now account for close to one-third of the total retail credit portfolio of the entire banking sector. And the way these two banks are going about expanding their retail business investing heavily in expanding their physical branch network, continued emphasis on alternative delivery channels such as ATMs/Internet, the technology initiatives they are undertaking to sustain the retail business as a high volume, commoditystyle business. There was a profound difference in business strategies. it is clear that a great retail-credit push is happening driven by a handful of private sector banks, while the public sector banks, as a category, do not seem to be in the race, either by choice or by design. Private sector banks seem to be operating a business strategy which is profoundly different from that followed by the public sector banks. Banks such as ICICI or HDFC possibly see the physical branch network as a critical Retail Banking and Financing requirement in their endeavor to increase the share of retail funding also in their overall funding patterns. In other words, while credit growth on the retail side is now working well as a business strategy, the effort now is to expand the overall retail banking franchise itself comprising liabilities as well as assets. The macroeconomic picture also suggests that retail credit business, which at present accounts for a quarter of the total credit business, will significantly rise as a proportion of the total lending business.

There was a stability of retail business and income. The perceived stability of the income stream from the retail business is probably the most important driver of the push into retail. From a strategic point of view, this stability is expected to offset the inherent volatility of revenues/profits from other lines of business, such as financial markets trading/corporate and commercial banking. a study of the earnings profile/balance-sheet structure of banks such as ICICI or HDF Cover the past few years does show the stability which has been imparted to the overall revenue stream by the retail business. This stability basically arises from the widely dispersed nature of the retail assets portfolio. This means that banks are able to significantly diversify away specific borrower risk and, at the aggregate level, are exposed to the overall systematic or Macro economic risk only. The retail bankers started funding, assets profile particularly among the private sector banks is well established .But what prevents this phenomenon from being labeled a retail banking expansion is the fact that the growth so far has been restricted to the asset side only for the private sector banks. The differences between the new private banks and public sector banks with respect to the funding profile/retail asset profile stand out. The future of retail banking, strategy to focus on retail may be optimal for the long term from a returns/risk point of view provided they can create and improve the infrastructure in terms of technology, people, processes and pricing. The business marketing model, for instance, where direct marketing agents have been employed in a systematic manner to source retail assets, has been a notable success with private banks registering quantum growth in their retail portfolios in the past few years. A similar model is yet to be tried out generally by public sector banks, though one has noticed a couple of banks beginning to employ such concepts. The funding base, in terms of the higher proportion of retail deposits, is also much more stable for public sector banks. Overall, the evolving economic environment does point to retail accounting for a much higher proportion of the balance sheets of financial intermediaries. The private sector banks seem to be well prepared for this scenario.

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