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
1. Retail deposits are stable and constitute core deposits.
2. They are interest insensitive and less bargaining for additional interest.
3. They constitute low cost funds for the banks.
4. Effective customer relationship management with the retail customers built a strong base.
5. Retail banking increases the subsidiary business of the banks.
6. Retail banking results in better yield and improved bottom line for a bank.
7. Retail segment is a good avenue for funds development.
8. Consumer loans are presumed to be of lower risk and NPA perception.
9.Retail banking helps economic revival of the nation through increased production activity.
10. Retail banking improves lifestyle and fulfils aspirations of the people through affordable credit.
11. Innovative product development credit.
12. Retail banking involves minimum marketing efforts in a demand-driven economy.
Disadvantages of Retail Banking
1. Designing own and new financial products is very costly and time consuming for the bank.
2. 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.
3. Customers are attracted towards other financial products like mutual funds etc.
4. Though banks are investing heavily in technology, they are not able to exploit the same to the full extent.
5. A major disadvantage is monitoring and follow up of huge volume of loan accounts inducing banks to spend heavily in human resource department
6. Long term loans like housing loan due to its long repayment term in the absence of proper follow-up, can become NPAs.