Retail-banking customers in India, like their counterparts throughout Asia, are very loyal to their domestic banks and quite hesitant to incur debt. Our recent survey on the attitudes of Indian customers toward personal financial services reinforces these assessments. But the study also found, beneath this veneer, significant differences among customer segments. These differences could present foreign entrants with opportunities in this growing market.

As part of a broader Asian effort, we surveyed more than 300 urban banking customers in India with annual household incomes greater than $1,150. Respondents were evenly divided between affluent and less affluent households.¹ A significant majority—69 percent—said that they would stay with their current bank, even if competitors offered lower fees and higher interest rates. This professed loyalty may be linked, at least in part, to a lack of alternatives. State-owned banks, with 75 percent of total assets and vast branch networks, dominate the sector. State Bank of India, for example, has the country's largest network, with more than 9,000 branches, while ICICI Bank, one of a new breed of private domestic banks, has fewer than 600.² Restrictions limit the number of branches that foreign banks can open and bar them from acquiring healthy domestic institutions (see "Reforming India's financial system").

All respondents in our survey expressed a loyalty to domestic banks. Younger and relatively affluent Indian consumers—the fastest-growing and most profitable customer segments—were much more likely to view the entry of foreign banks as advantageous (Exhibit 1), however, perhaps believing that increased competition will bring benefits, such as the chance to try new products and services.

The sentiments of our respondents about credit reflect a similar dichotomy. While 65 percent agreed that "borrowing is dangerous and can lead to loss of face," a closer examination of the results shows, for instance, that younger and middle-income households are much more likely than other consumers to apply for a mortgage (Exhibit 2). Overall, mortgage penetration rates remain very low, with only about 6 percent of our respondents (primarily 30- to 39-year-olds) holding a mortgage, compared with 15 percent in our overall sample.³ Credit card penetration is also low, at 18 percent (compared with 45 percent in Asia as a whole), and wealthier and older customers are more likely to make purchases with plastic. Our projections, however, show that the number of credit cards will continue to grow by about 25 percent a year through the end of the decade.

Wealth-management services also represent a chink in India's loyalty armor. Only 10 percent of our Indian respondents have used a financial adviser—still a relatively large share compared with the percentage in other Asian countries. Yet more than half of our sample, in all age and income categories, said that they would like more assistance with managing their investments. A significant portion of these customers indicate that they would be willing to pay for such advice (Exhibit 3). Very few banks currently offer it, however, thus leaving the market to tax advisers and accountants.

Foreign entrants hoping to capitalize on these trends will have to accommodate a preference among Indian customers for dealing with people rather than machines. Seventy-five percent of our sample favored personal contact, up from 55 percent in a similar survey conducted in 1999. Nevertheless, change is evident behind these numbers. ATM usage rose sixfold from 1999 to 2004, and now 39 percent of bank customers use teller machines. Customers in their 20s were almost twice as likely as those in other age groups to use ATMs, whose availability has grown dramatically during the same period. State Bank, for example, increased its network to more than 3,400 machines, from some 200.

While our survey highlighted the formidable barriers that foreign entrants face, it also revealed a retail market with a progressive openness to new players and products. Indeed, customers ranked knowledgeable investment advice, reasonable waiting times, the quick resolution of problems, and a full range of products and services as the most important factors when choosing a bank, far ahead of other concerns, such as convenient branch locations and hours of operation. Of the 12 percent of respondents who had experienced a defining moment of service (for good or ill) with their bank, 63 percent said this critical interaction was negative—strongly suggesting an opportunity for institutions that can provide stellar service.

India's retail-banking market is expanding rapidly, with total annual revenues expected to more than double, to $16.5 billion, by 2010, from about $6.4 billion today. An increasing number of banking customers in India value the skills and portfolios of products offered by multinational banks, whose experience in highly competitive markets could help them break through the wall of loyalty.