The banking sector has seen a conscious shift from corporate lending to retail lending in the past few months. S.S. Mundra, executive director, Union Bank of India, believes that retail lending is the best business strategy for any bank in the current market conditions. In conversation with Mint Money, Mundra talks about why low-cost products are not marketed well and how the government-run bank is coming to terms with technology, while trying to maintain a balance between traditional and new-age banking.
Banks have shifted focus on retail lending. How good is retail lending as a business model for banks?
It is a misconception that corporate loans are the best business models for banks. On the face, one feels that through a single transaction, a bank gets big business but when you look at it from the perspective of risk, value generation or margins, retail lending makes more sense. In the current landscape, retail lending is no doubt a better option and all major banks are focusing on it.
You had recently cut interest rates for education loans, a step which can help build your retail profile. But the process of getting a loan from a government-run bank is tedious. Why is it so?
Most private sector banks are very selective about whom they give education loans. It is always easier to give an education loan to a student who has got admission in a premier institute and who comes from a decent background. And private banks can focus on them because they have few targets and all other parameters are predefined.
Now as a government-owned bank, we have to cater to all kinds of institutions and people coming from different backgrounds. In such a scenario, probably due diligence becomes a little longer. Currently, at operational or branch levels, there may be delays but overall the policy is to make the procedure prompt. Also for banks, education loan is a strategy to catch the customers young because if he is satisfied he will come back for all his banking needs such as home loan, fixed deposit and personal loans.
In the retail segment, low-cost products such as basic savings account are not marketed well. Is it because it doesn’t make business sense for the banks?
When it comes to low-cost products, banks have to incur the cost for it initially and the returns normally see a lag. Having said that, low-income group is a huge segment that can’t be ignored because today’s low cost or no-frill account holder is the potential middle class of tomorrow. Hence, it is the right time to invest in them even though the maturity time for these accounts is at least two to three years. Nobody here is doing any social service by catering to this segment and it makes perfect business sense for any bank. There are banks that have got used to wholesale banking and they will take some time to attend to this segment as they are not prepared for it yet. Overnight an organization that was designed and equipped to deal with 100 people can’t start dealing with 10,000 people. That is one of the reasons why low-cost products are not marketed well. However, gradually banks will raise the capacity and sell these products.
Coming to other changes in the banking sector, the way technology is used now has undergone major change. What are you doing in that space?
Yes, things have changed in the banking space and technology has become more prominent now than ever in India. However, you can never borrow a model completely from another country, say the UK, and make it work in India There are a few things that are peculiar to India and hence we need to customize the products in the banking space. Like McDonalds had to introduce McAloo for India and Marks & Spencer had to design shirts with pockets, in the banking space we have decided to give both—the brick and mortar branch along with Internet and mobile banking.
I expect mobile banking to pick up in a big way. I strongly believe that like our economy moved from agriculture to services almost bypassing manufacturing, in banking we will take a big leap from branches to mobile banking bypassing Internet banking.
In an attempt to maintain a balance between traditional and new-age banking, we have taken initiatives to equip the bank staff to focus more on customer service. For those who are not comfortable in dropping the check in a box, we have installed a machine that will give a photo-generated receipt when the cheque is dropped at the branch. For those who are sentimental about their passbook, we have put up an machine that updates the details immediately. Meanwhile, for those who prefer cashless payment, we tweak the existing product to address their needs.