Almost every commercial bank operating in India has been chasing the retail pie at break-neck speed as if there is no tomorrow. If this trend gives you the impression that this is the most lucrative segment to be in, think again.

In a survey of 20 foreign banks sponsored by PricewaterhouseCoopers, two foreign banks said they made losses in retail banking in 2004-05.

For one foreign bank, retail banking was only marginally profitable (return on capital of less than 10 per cent), while four others said it was "very profitable" for them, with returns on equity ranging from 20 to 30 per cent.

The survey, completed in December 2005, covered foreign banks with significant presence such as Citibank, HSBC and Standard Chartered Bank to small niche players which focus on one business line like trade finance.

Apart from the top three foreign banks, the other retail players which participated in the survey included ABN AMRO Bank and ING Vysya Bank [Get Quote].

The survey found that foreign banks had strong performance in investment banking and treasury operations. Three foreign banks had extremely profitable (over 30 per cent return on equity) investment banking business.

This business was very profitable for another three and profitable for three others.

Treasury operations were "extremely profitable" for eight foreign banks. Wealth management business was "extremely profitable" for four banks and selling life insurance, mutual funds and distribution of third-party products was also "extremely profitable" for many foreign banks.

The foreign banks surveyed predict that product changes and increased competition would require 75 per cent of the foreign banks to change their business models over the next three years.

The survey was conducted for PwC by Brian Metcalfe, an associate professor at the Business School at Brock University in Canada through personal interviews, using a standard questionnaire.

Analysts said the foreign banks were disadvantaged in retail banking as aggressive Indian private sector banks pushed the interest rates down, squeezing the margins in mass business.

The retail boom saw interest rates on housing loans drop to a low of 7.5 per cent from a high of around 15 per cent in 2000 and on car loans to around the same levels from 15-23 per cent earlier.

Ten of the foreign banks predict their combined base of retail customers to more than double to 25.8 million by 2008 from 11.2 million now.