Risks in retail banking

Retail banking isn't what it used to be. There was a time when simply offering somebody a current account, a personal loan and a car loan was enough to keep them satisfied.

There were fewer banks in the market and enough customers probably just walked in through the door to keep the bank going. Few banks were listed and even if they were, few people were playing the stock market, so there was less pressure to produce quarter after quarter of stunning results.

Today, the picture is completely different. Regional populations have grown rapidly and economic bouyancy has created a class of people who seemingly want to spend, spend, spend on consumer goods.

The opening of regional real estate markets has created a society of homeowners, who all need home finance, insurance and, in many cases, household re-development loans.

Needless to say, this is all good. Consumer spending is, after all, a key driver of economic activity.

All of these affluent consumers are also driving product development on the part of banks, which is something that was badly needed.

Home loans, for example, are no longer offered purely on a short term, fixed rate basis. We now have variable rate, variable term mortgages, although it must be said that interest rates are still far too high compared to Western economies.

The credit card has become a particularly fierce battleground for banks. They now offer us all sorts of incentives - such as air miles, free gadgets and competitions galore - to encourage us to spend more than we can afford. Controversy over their legitimacy aside, we now even have Islamic credit cards.

Another area that is on the banks' radar is home and life insurance, products that regional banks generally didn't even offer five years ago. Every bank now has a wealth management division and they are pitching these products to consumers of all income levels, rather than simply focusing on the very wealthy.

Inevitably, this boom brings with it challenges. Aside from customers complaining about high pressure sales tactics, there are concerns about the broader effects of too much lending, a subject touched upon in this column last month.

A report on this month's Arabian Banking & Finance issue highlights analysts' concerns over banks' continued refusal to share credit information. They also highlight just how easy it is to borrow up to 15 times one's salary. A build-up in non-performing loans cannot be ruled out, they say.

As things stand, banks' balance sheets look rosy and they continue to turn in the kinds of profits that delight investors. With the long term in mind, banks are urged to lending policies and find a way to share credit information.

David Ingham is the editorial director of ITP Business.

RELATED LINK: Banks in credit risk warning

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