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Tuesday, April 12, 2016

Retail Banking and Wholesale Banking

Retail Banking – Introduction, Advantages and Disadvantages
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: Advantages of Retail Banking are given below
a)      Retail deposits are stable and constitute core deposits.
b)      They are interest insensitive and less bargaining for additional interest.
c)       They constitute low cost funds for the banks.
d)      Effective customer relationship management with the retail customers built a strong base.
e)      Retail banking increases the subsidiary business of the banks.
f)       Retail banking results in better yield and improved bottom line for a bank.
g)      Retail segment is a good avenue for funds development.
h)      Consumer loans are presumed to be of lower risk and NPA perception.

i)        Retail banking helps economic revival of the nation through increased production activity.
j)        Retail banking improves lifestyle and fulfils aspirations of the people through affordable credit.
k)      Innovative product development credit.
l)        Retail banking involves minimum marketing efforts in a demand-driven economy.
Disadvantages of Retail Banking: Disadvantages of Retail Banking are given below:
a)      Designing own and new financial products is very costly and time consuming for the bank.
b)      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.
c)       Customers are attracted towards other financial products like mutual funds etc.
d)      Though banks are investing heavily in technology, they are not able to exploit the same to the full extent.
e)      A major disadvantage is monitoring and follow up of huge volume of loan accounts inducing banks to spend heavily in human resource department
f)       Long term loans like housing loan due to its long repayment term in the absence of proper follow-up, can become NPAs.
Wholesale Banking
Wholesale or corporate banking refers to dealing with limited large-sized customers. Instead of maintaining thousands of small accounts and incurring huge transaction costs, under wholesale banking, the banks deal with large customers and keep only large accounts. These are mainly corporate customer. Wholesale banks are mainly engaged in financing, underwriting, market making, consultancy, mergers and acquisitions and fund management.
Retail Banking Vs Wholesale banking
a)      Retail banking refers to that banking which targets individuals and the main focus of such banks is retail customer whereas wholesale banking refers to that banking which targets corporate or big customers and their main focus is providing services to corporate clients.
b)      Ticket size of loans given in retail banking is low and due to it impact of NPA will be less pronounced due to diversification as compared to wholesale banking where ticket size of loan is very high and due to it impact of NPA is more pronounced.
c)       Loans such as car, housing, educational, personal loans are some of the examples of loans given in retail banking whereas loans such as loan for setting industry, machinery advance, export credit are some of the examples of loans given in wholesale banking.
d)      Monitoring and recovery if the loan turn out to be NPA in retail banking is more difficult because customer base is wide whereas in case of wholesale banking due to low customer base it is easy to monitor as well recover the loan given to customers.
e)      Cost of deposit is low in retail banking because retail customers do not have the bargaining power due to less deposit with them whereas in case of corporate customers banks have to offer them high interest rates in order to attract funds from them.

f)       Retail banking requires large network of branches in order to cater to large customer base and hence it results in high operational costs while in case of wholesale banking small number of branches is sufficient to cater to corporate clients.