Most banks have failed to execute retail plans

Last month in Bangalore, I met a senior executive of a private sector bank who is driving its retail business. The bank has received the regulator’s nod to open 40-odd new branches, most of them in western and northern India. The objective, the executive says, is to have an all-India presence, a prerequisite for business growth. Early November, M.D.

Mallya, the chairman of Pune-based Bank of Maharashtra, a public sector bank, had told me that his bank would open about 70 branches across the country over the next few months. His bank, too, does not want to be seen as a regional player whose business activities are largely confined to Maharashtra. Bankers in India, across sectors, are speaking the same language. Regional players want to have a national presence and those who already have one, want to reach out to un-banked areas.

They want to focus on retail and consumer loans to de-risk their advance portfolio. Too much focus on corporations for lending is risky as one big loan turning bad can create a big hole in a bank’s balance sheet. In contrast, exposure to a bunch of small loans can balance the lending portfolio. Besides, retail and consumer loans also offer higher return to banks. As an extension of the same strategy, almost all banks also want to lend to small and medium enterprises (SMEs) and traders.

Here again, they earn a little extra on their exposure as traders and entrepreneurs are always willing to pay higher interest rates than large corporations. For them, access to bank loan is more important than the price of the loan. Banks also want to bring down their cost of deposits by focusing on current accounts and savings accounts (CASA). On savings bank accounts, banks pay 3.5% interest, while current accounts do not attract any interest at all.