COI I OQUl UM

incIudes debate by practitioners and

academicians on a contemporary topic
Indian Banking Sector:
Challenges and Opportunities
KV Kumuth, SS Koh, PS Shonoy, kunjunu Kumur,
kM Nuyuk, und P1 Kuppusvumy
N kuvthundrun tCoordnutor)
A dstngushod puno ol munugng drottors und thol oxotutvo olltors ol somo ol tho
vo-knovn bunks n tho tountry rospondod to tho thomo on tho thuongos und
opportuntos lutod by tho lndun bunkng sottor n tho boruzod onvronmont. 1ho
tontrbutors uddrossod tho loovng ssuos:
lnuntu rolorms vth spotlt roloronto to lndun bunkng ndustry lotusng on
mptutons to tho oxstng puyors, nov ontrunts, mutnutonus, und tonsumor
bohuvour.
Nov und omorgng opportuntos: tonsumor und tommortu bunkng.
Compotton: puyors, ntonsty, murkot szo, proltubty, und grovth.
kosponsos to thuongos vth roloronto to rostrutturng, uutomuton, produtt
dovory, und protoss roongnoorng.
lssuos routod to govornunto, roguuton, und uudt.
Produtt ongnoorng, produtt dosgn, und produtt dovory.
Consumor oxpottutons, loodbutk, tross-song, tustomor routonshp
munugomonttCkM), murkot sogmontuton, murkotng, brundng, und nov produtts
ntrodutton.
Hk routod ssuos: VkS, tomponsuton, odututon und trunng, ompovormont, und
turoor pun.
luturo stonuro: roud tronds n tho noxt lvo yours und tho oxpottod poston.
L-bunkng und ts mportunto.
Suont louturos ol tho rosponsos ntudod:
1ho lndun bunkng sottor s ut un oxttng pont n ts ovouton. 1ho opportu-
ntos to ontor nov busnoss und nov murkots und to dovor hghor ovos ol
tustomor sorvto uro mmonso.
As tho lndun bunks poston thomsovos us lnuntu sorvto provdors, bunkng
busnoss s gottng rodolnod. 1othnoogy s unsottng tho ouror busnoss
protossos und tustomor bohuvour s undorgong thungo. 1hoso huvo onhuntod
tho lortos ol tompotton.
Compottvo udvuntugo tun bo uthovod through hurnossng tho potontu
uvuubo n tho ompoyoos by troutng u postvo vork tuturo und onstng tho
support ol u tho ompoyoos to tho orgunzutonu gous.
lndun bunks huvo udoptod bottor oporutonu strutogos und upgrudod thor
sks. 1hoy huvo vthstood tho ntu thuongos und huvo botomo moro
uduptvo to tho thungng onvronmont.
ln tho tompox und lust thungng onvronmont, tho ony sustunubo tompottvo
udvuntugo lor bunks s to gvo tho tustomor un optmum bond ol tothnoogy und
trudtonu sorvto.
lour tronds uro lundumontuy utorng tho bunkng ndustry: tonsoduton,
gobuzuton ol oporutons, dovoopmont ol nov tothnoogos, und unvorsu-
zuton ol bunkng.
fxecutive Summary
KLY \CkDS
Disintcrmcdiation
fcc-and fund-bascd usincss
Crcdit kisk
f-banking
CkM
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 83
83
N Ravichandran (Professor N Ravichandran (Professor N Ravichandran (Professor N Ravichandran (Professor N Ravichandran (Professor, IIMA): , IIMA): , IIMA): , IIMA): , IIMA): The economic re-
forms initiated by the Government of India roughly about
a decade ago have changed the landscape of several sec-
tors of the Indian economy. The Indian banking sector is
no exception. This sector is going through major changes
as a consequence of economic reforms. The changes af-
fect the ownership pattern of banks, availability of funds,
the cost of funds as well as opportunities to earn, range
of services (fee-based andfund-based), and management
of priority sector lending. As a consequence of liberaliza-
tion in interest rates, banks are operating on reduced
spread. Development financial institutions would have a
lesser impact on the Indian economy. Consumerism is
here to stay. Non-banking products like insurance would
be a tremendous opportunity.
The economic reforms have also generated new and
powerful customers (huge Indian middle class) and new
mix of players (public sector units, private banks, and
foreign banks). The emerging competition has generated
new expectations from the existing and the new custom-
ers. There is an urgent need to intro-
duce new products. Existing products
need to be delivered in an innovative
and cost-effective way by taking full
advantage of emerging technologies.
The new rules of competition
require recognition of the importance
of consumers and the necessity to ad-
dress the needs through innovative
products supported by new techno-
logy. As a consequence of competition, the managerial
challenges include market segmentation, product posi-
tioning, innovative delivery channels, cross-selling, etc.
At an organization level, elaborate systems need to be
evolved to manage, assess, and contain risk (including
portfolio, client, and exchange rate).
The banks may have to reorient their resources in the
form of reorganized branch networks, reduced manpower,
dramatic reduction in establishment cost, honing the skills
of the staff, and innovative ways of attracting talented
managerial pool.The Government of India and the Re-
serve Bank of India (RBI) on their part would strengthen
the existing norms in terms of governing and directing
the functioning of these banks. Banks needs to strengthen
their audit function. They would be evaluated based on
their performance in the market place. It is in this context
that we have invited the chief executive officers of Indian
banks to respond to the issues mentioned earlier.
K V Kamath (MD and CEO, ICICI Bank): K V Kamath (MD and CEO, ICICI Bank): K V Kamath (MD and CEO, ICICI Bank): K V Kamath (MD and CEO, ICICI Bank): K V Kamath (MD and CEO, ICICI Bank): It is said that
the banking sector mirrors the larger economy its link-
ages to all sectors make it a proxy for what is happening
in the economy as a whole. Indeed, the Indian banking
sector today has the same sense of excitement and oppor-
tunity that is evident in the Indian economy. The funda-
mental structural changes in recent years have taught us
many lessons. A combination of developments arising
from technological advancements and a liberalized mar-
ketplace disintermediation, blurring of traditional roles
and boundaries, emphasis on shareholder value creation
has led to a transformation of the banking sector.
The ongoing developments in Indian industry and
government and the integration of India with the global
markets also offer myriad opportunities to the banking
sector. Companies and governments are increasingly seek-
ing high-quality banking services to improve their own
operating efficiency. Companies seek to offer better cus-
tomer service and maximize shareholder returns and gov-
ernments seek to improve the quality of public services.
The internationalization of India of-
fers banks the opportunity to service
cross-border needs of Indian compa-
nies and India-linked needs of multi-
nati onal s. The growi ng Indi an
diaspora, with its strong home coun-
try linkages, seeks a unique combi-
nation of Indian ethnicity and global
standards that offers a valuable niche
opportunity for Indian banks.
The biggest opportunity for the Indian banking sys-
tem today is the Indian consumer. Demographic shifts in
terms of income levels and cultural shifts in terms of life-
style aspirations are changing the profile of the Indian
consumer. This is and will be a key driver of economic
growth going forward. The Indian consumer now seeks
to fulfil his lifestyle aspirations at a younger age with an
optimal combination of equity and debt to finance con-
sumption and asset creation. This is leading to a growing
demand for competitive, sophisticated retail banking
services. The consumer represents a market for a wide
range of products and services he needs a mortgage to
finance his house; an auto loan for his car; a credit card
for ongoing purchases; a bank account; a long-term in-
vestment plan to finance his childs higher education; a
pension plan for his retirement; a life insurance policy
the possibilities are endless. And, this consumer does not
live just in Indias top ten cities. He is present across cit-
1ho nov ruos ol tompot-
ton roquro rotognton ol
tho mportunto ol tonsum-
ors und tho notossty to
uddross tho noods through
nnovutvo produtts sup-
portod by nov tothnoogy.
84 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
84
ies, towns, and villages as improving
communications increases awareness
even in small towns and rural areas.
Consumer goods companies are al-
ready tapping this potential it is for
the banks to make the most of the
opportunity to deliver solutions to
this market.
The prerequisite for capitalizing
on these opportunities is technology.
Technology is key to servicing all cus-
tomer segments offering conven-
ience to the retail customer and oper-
ating efficiencies to corporate and
government clients. The increasing sophistication, flex-
ibility, and complexity of product and servicing offerings
makes the effective use of technology critical for manag-
ing the risks associated with the business. Developing or
acquiring the right technology, deploying it optimally,
and then leveraging it to the maximum extent is essential
to achieve and maintain high service and efficiency stand-
ards while remaining cost-effective and delivering sus-
tainable returns to shareholders. Early adopters of tech-
nology acquire significant competitive advantage. Man-
aging technology is, therefore, a key challenge for the
Indian banking sector. Wide disparities exist between
various banks as far as technology capabilities are con-
cerned; the sector as a whole needs to make significant
progress on this front.
Building knowledge-driven, learning organizations
is important in the current scenario of rapidly evolving
operating environments. Knowledge and assimilation of
new ideas and trends are essential to keep the organiza-
tion ahead on the curve. This is true for banking as it is for
all other sectors. Banks must continuously seek to be
aware of cutting edge practices in
banking internationally and institu-
tionalize this learning across the or-
ganization. This will prepare them for
the future as Indian markets become
more sophisticated and integrated
into the global financial markets.
Another critical area for the Indian
banking sector is people. The ability
to attract and retain talent is a key
success factor for a people-oriented
business like banking. Banks have to
build organizations that are process-
driven yet innovative, stable yet flex-
ible, and responsive to change.
The Indian banking sector con-
tinues to face some structural chal-
lenges. We have a relatively large
number of banks, some of which are
sub-optimal in size and scale of op-
erations. On the regulatory front,
alignment with global developments
in banking supervision is a focus area
for both regulators and banks. The
new international capital norms re-
quire a high level of sophistication in
risk management, information sys-
tems, and technology which would pose a challenge for
many participants in the Indian banking sector. The deep
and often painful process of restructuring in the Indian
economy and Indian industry has resulted in asset qual-
ity issues for the banking sector; while significant progress
is being made in this area, a great deal of work towards
resolution of these legacy issues still needs to be done.
The Indian banking sector is thus at an exciting point
in its evolution. The opportunities are immense to enter
new businesses and new markets, to develop new ways
of working, to improve efficiency, and to deliver higher
levels of customer service. The process of change and
restructuring that must be undergone to capitalize on
these opportunities poses a challenge for many banks.
Going forward, this sector will witness increased
competition between domestic players and possibly also
from foreign banks that may seek to expand their pres-
ence in the Indian market, given the opportunities that
the Indian market offers. The winners in this sector will
be the players who can understand the customer, fulfil
customer needs, and achieve high levels of customer re-
tenti on, l everagi ng technol ogy,
knowledge, and human resources to
provide quality products and serv-
ices and manage risks and returns,
thereby del i veri ng val ue to al l
stakeholders.
S S Kohli (CMD, Punjab National S S Kohli (CMD, Punjab National S S Kohli (CMD, Punjab National S S Kohli (CMD, Punjab National S S Kohli (CMD, Punjab National
Bank): Bank): Bank): Bank): Bank): Our countrys financial re-
form process which was initiated a
decade ago has covered almost all the
important facets of banking and has
resulted in improved bank perform-
1ho bggost opportunty lor
tho lndun bunkng systom
toduy s tho lndun ton-
sumor. Domogrupht shlts
n torms ol ntomo ovos
und tuturu shlts n torms
ol lostyo usprutons uro
thungng tho prolo ol tho
lndun tonsumor. 1hs s
und v bo u koy drvor ol
otonomt grovth gong
lorvurd.
1ho lndun bunkng sottor
s ut un oxttng pont n ts
ovouton. 1ho opportun-
tos uro mmonso - to ontor
nov busnossos und nov
murkots, to dovoop nov
vuys ol vorkng, to m-
provo olltonty, und to
dovor hghor ovos ol
tustomor sorvto.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 85
85
ance. In fact, the banking industry has undergone a com-
plete transformation. The most distinct aspect of the fi-
nancial reforms was that they were in the nature of pre-
emptive rather than crisis-led. In other words, unlike
many of the emerging economies which undertook fi-
nancial reforms as a result of banking crises, in India, the
reform process was initiated with the recognition that the
real sector reforms carried out to mitigate the 1991 ba-
lance of payment crisis cannot be sustained without re-
forming the financial sector. No doubt, the success of the
reforms was aided to a large extent by the relative macro-
economic stability during the period. Another distinguish-
ing feature of the reforms was the successful sequencing.
Gradualism, which was the hallmark of the Indian re-
form process, was indeed the outcome of the democratic
polity where popular consensus is crucial.
A review of performance of
banks by the RBI (1999) i n the
deregul ated envi ronment has
brought out certain important find-
ings:
Reflecting improvement in effi-
ciency, the interest spread for
banks has shown a decline and
there has been a tendency to-
wards convergence in this res-
pect, across all bank groups, ex-
cept foreign banks.
Consequent to decline in oper-
ating expenses, particularly staff
costs, the costs of financial inter-
mediation have fallen.
Banks have, by and large, im-
proved their asset portfolio;
there has been improvement in capital adequacy of
banks as well.
The cost-to-income ratio has shown improvement in
respect of SBI group and nationalized banks.
Non-interest income as per cent of working funds
has shown modest increase.
The reform process has been sweeping in its cover-
age. Banks have already implemented internationally
followed prudential accounting norms for classification
of assets, income recognition, and loan loss provisioning.
Following the Bank for International Settlements (BIS)
guidelines, capital adequacy norms have also been pre-
scribed. To meet the additional capital requirements,
public sector banks have been allowed to access the market
for funds. The government has indicated its desire for
disinvestment of its stake up to 33 per cent in the banks.
Interest rates have been deregulated while the rigour of
directed lending has been progressively reduced. That
India did not catch the Asian flu which afflicted the
South East Asian economies in the nineties can be largely
attributed to the successful implementation of pruden-
tial norms in the financial sector.
A number of measures has been taken to bring down
the level of Non-Performing Advances (NPAs) like estab-
lishment of Debt Recovery Tribunals (DRTs), Lok Adalats,
and the system of One-Time Settlement (OTS) of dues
through mutual negotiation. Besides, the government has
proposed to abolish the SICA and the BIFR. As an alter-
native, the system of Corporate Debt Restructuring (CDR)
based on the London Approach has been put in place
which is a voluntary process of in-
dustrial rehabilitation. The Securi-
tization and Reconstruction of Finan-
cial Assets and Enforcement of Secu-
rity Interest (SERFAESI) Act passed
by the government is a step towards
improving the recovery environment.
This Act provides the powers of seize
and desist to bankers. The Act also
provides for setting up Asset Recon-
struction Companies (ARCs) to take
over the bad debts of banks and thus
help in cleansing the balance sheet of
banks. While this will address what
is known as stock of NPAs, to tackle
the flow of NPAs, banks are imple-
menting credit risk management sys-
tems.
Recently, banks have adopted customer segmenta-
tion which has helped in customizing their product port-
folio as well. Thus, retail lending has become a focus area
particularly in respect of financing of consumer dura-
bles, housing, automobiles, etc. Retail lending has also
helped in risk dispersal and in enhancing the earnings of
banks with better recovery rates.
Since as much as 65 per cent to 70 per cent of the total
operating costs account for establishment expenses, ra-
tionalization of manpower in the industry is crucial.
Recognizing this, public sector banks have implemented
a Voluntary Retirement Scheme (VRS) targeting employ-
ees at various levels as a result of which nearly 12 per cent
of the workforce opted to retire. The gains in terms of
Cruduusm, vhth vus
tho humurk ol tho lndun
rolorm protoss, vus n-
dood tho outtomo ol tho
domotrutt poty vhoro
popuur tonsonsus s
trutu...1hut lndu dd
not tutth tho Asun lu
vhth ullttod tho South
Lust Asun otonomos n
tho nnotos tun bo urgoy
uttrbutod to tho suttosslu
mpomontuton ol prudon-
tu norms n tho lnuntu
sottor.
86 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
86
reduction in establishment expenses arising out of the
implementation of VRS will become available in the
medium term. Increase in staff productivity has been
visible in the immediate term. In their bid to control ex-
penses, banks are also cutting down on tiers of control
and rationalizing their branch network by mergers and
closure wherever required.
With the system of prudential regulation in place,
structural regulation in the banking sector has been re-
laxed. Private banks have been established widening the
choice for consumers and increasing the market size.
Technology is emerging as a key driver of business
in the financial services industry. The advancements in
computing and telecom have revolutionized the finan-
cial industry and banking on the net is fast catching on.
Banks are developing alternative channels of delivery
like ATMs, telebanking, remote ac-
cess, internet banking, etc. The pay-
ment and settlement system is also
being modernized. RBI is actively
pursuing the objective of establish-
ing a Real Time Gross Settlement
(RTGS) system on par with other de-
veloped economies. Customers real-
izing the benefits of technology are
demanding more for less.
Wi th gradual deregul ati on,
banks are now exposed to different
types of risks. In view of the dynamic
nature of the financial market, banks
face various market risks like inter-
est rate risk, liquidity risk, exchange risk, etc. In respect
of lending, they face credit risk which includes default
risk and portfolio risk. Besides, banks also face risks like
reputational risk and operational risk. Putting in place a
robust risk management system is, therefore, critical.
The ultimate responsibility of the soundness of a bank
rests on the board of directors. It is imperative that it
ensures that the management takes only such risks as can
be managed and put in place proper risk mitigation sys-
tems. This requires that the board is well informed of the
managements actions and can satisfy itself on the qual-
ity of the reports that are being placed to it. These form
the basis for corporate governance. Adoption of good
corporate governance practices has been engaging the
attention of banks as well as the regulators and owners.
Towards this end, banks in India have already put in place
the Audit Committee of the Board (ACB) which has been
entrusted with the task of overseeing the organization,
operationalization, and quality control of the internal
audit function and follow-up with the statutory and ex-
ternal auditors of the bank as well as examination by the
regulators. Disclosure levels in bank balance sheets have
been significantly enhanced while measures have also
been initiated to strengthen corporate governance in
banks following the suggestions of the Ganguly Com-
mittee. Banks are bringing out consolidated balance sheets
reflecting the performance of their subsidiaries and pro-
viding for better transparency.
As the Indian banks move gradually beyond univer-
sal banking and position themselves as financial service
providers, banking business is getting redefined. Tech-
nology is unsettling the earlier business processes and
customer behaviour is undergoing change. These have
enhanced the forces of competition.
To survive under these conditions, the
public sector banks will have to un-
dertake business process reengi-
neering, redefine their strategy, and
reorient their organization structure.
Besides, they will have to align their
IT strategy and HR strategies to the
overall business strategy.
Given the above challenges,
what would be the likely trends in
the next five years? Such vision for
the banking industry may encompass
the following aspects: structure; strat-
egy; systems; staff and regulatory.
Despite liberalization, the structure of the Indian
banking system has continued without much change.
Public sector banks dominate the industry while the pri-
vate and foreign banks have continued to co-exist. The
consolidation process within the industry has been re-
stricted to a few mergers in the private sector. However,
there is recognition that size is important and this em-
phasis on increasing the balance sheet can be expected to
lead to consolidation in the public sector in the near fu-
ture. This, of course, is strongly predicated on the ena-
bling conditions provided by the owner (Government of
India). As suggested by the Narasimham Committee, such
mergers could be market-driven instead of externally
imposed. The consolidation process could lead to emer-
gence of four or five large banks with country-wide pres-
ence and offices abroad who could act as national cham-
pions. At the same time, smaller private sector banks and
1ho tonsoduton protoss
toud oud to omorgonto
ol lour or lvo urgo bunks
vth tountry-vdo pros-
onto und olltos ubroud
vho toud utt us nutonu
thumpons. At tho sumo
tmo, smuor prvuto sottor
bunks und lorogn bunks
v tontnuo to to-oxst
muny us ntho puyors.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 87
87
foreign banks will continue to co-exist mainly as niche
players. For instance, these banks, especially the new
private sector banks, may specialize in derivative busi-
ness including commodity-based products, investment
banking, etc. as well as act as advisory in mergers and
acquisitions.
The Development Financial Institutions (DFIs) as
they exist now are no longer viable. Instead, it can be
expected that their business model would follow that of
banks and accordingly they would adopt the financial
conglomerate model.
The other aspect of structure relates to convergence.
With distinction between banks and non-banks blurring,
there is increasing convergence of product portfolio. Banks
are taking up insurance business and through this they
aim to achieve economies of scope. The objective is to
achieve cross-selling, leveraging upon their franchise
value. Already, the bancassurance model has been
adopted by Indian banks and this
trend can only be expected to grow.
This segment will also see some
shake-ups in the next five years and
result in consolidation or takeover of
business.
Thus, the structure of Indian
banking system may be expected to
undergo a transformation, the main
drivers of which will be consolida-
tion, convergence, and technology.
This will also reduce overcapacity in
the Indian banking system and result
in banking concentration.
The changes in structure would also impact on the
banking strategy. Banks would grow out of their narrow
focus on banking services to become financial service
providers. The one-stop-shop approach would enable
them to provide, besides banking services, a host of other
financial products, both to the retail as well as corporate
customers. Thus, the distinction between retail and cor-
porate business would become sharper impacting on the
revenue model.
Though foreign participation in public sector banks
may be allowed, it is difficult to envisage government
ceding control of public sector banks in the near future.
Further, the government has stated that even if its stake
is diluted, it would continue to appoint the CMD of banks.
This would dampen any interest foreign players may show
in associating with public sector banks. In essence, the
next five years will see no major change in respect of
public sector character of banks.
With most of the banks listed, and some of them listed
abroad, the pressures on performance will be visible.
Banks would be adopting international accounting stand-
ards and their balance sheets would be more transparent.
Instead of maximizing shareholder value, they could be
using the triple-bottomline approach to quantify finan-
cial, environment, and social performance.
Due to adoption of technology, alternative channels
of delivery would become more active. This, in turn,
would result in a leaner branch network and better skilled
workforce. Technology, therefore, will impact on the busi-
ness model strongly by cutting down costs of delivery
and transaction. The emphasis will be on acquiring new
customers and maximizing opportunities for cross-sell-
ing.
Banks will also come under increasing pressure to
diversify their revenue streams. Since
capital market competes with the
banking system closely, which other-
wise is termed as disintermediation,
the importance of bank lending could
be expected to decline. As a result,
the share of interest income in banks
revenue would come down necessi-
tating them to look for other sources
of revenue. Fee-based income would
emerge as an important revenue
stream as would income from cross-
selling of products.
To drive down costs, banks may
outsource non-core services. This will help in maintain-
ing lower manpower which can be more focused on core
services and reduce operating expenses.
In Indian banking, technology has become an ena-
bler and is moving on to become a driver of business.
Large scale computerization of branches and operations
has enabled the banks to capture more of their business
on computers resulting in operational efficiencies includ-
ing better customer service. If this can be called the first
phase of technology adoption, it has been quite success-
ful insofar as banks have been able to adopt IT effectively
to carry out front-office operations. This phase has also
seen a reorientation of the staff in terms of newer skills
albeit at a lower level.
But, such large scale computerization, per se, will
not help in other operational areas like back-office func-
unks v tomo undor
ntrousng prossuro to
dvorsly thor rovonuo
stroums. Snto tuptu
murkot tompotos vth tho
bunkng systom tosoy,
vhth othorvso s tormod
us dsntormoduton,' tho
mportunto ol bunk ond-
ng toud bo oxpottod to
dotno.
88 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
88
tions, MIS, fraud prevention, value-
addition, marketing, and higher busi-
ness.
Wi th customers demandi ng
speed, efficiency, and lower costs, use
of technology has proliferated. Banks
have now taken up the second phase
where they are aiming at achieving
connectivity between branches, set-
ting up of Central Data Repository, generation of MIS,
prevention of frauds, evolving value-added products,
reducing transaction costs, and new initiatives like cross-
selling, CRM, etc.
The current emphasis is on providing alternative
channels of delivery like ATMs, telebanking, internet
banking, etc. The provision of a host of financial services
through a versatile technology platform will enable banks
to acquire more customers, cut costs, and improve serv-
ice delivery.
There is no doubt that technology will become a key
driver of financial business. The question is: What will be
the next set of technology initiatives considering that
banks have moved from mechanization technology to
large scale computerization of branches and operations
and are now engaged in networking and development of
alternative channels and internet banking?
It is clear that on-line finance will pick up and there
will be increasing convergence in terms of product offer-
ings banking services, share trading, insurance, loans,
etc. This could lead to banks adopting CRM strategies
based on the data warehousing and data mining tech-
nologies. Anytime anywhere banking will become com-
mon and will have to be upscaled. Such upscaling could
include banks launching separate internet banking serv-
ices apart from traditional banking services.
In the post-VRS scenario, banks have been able to
bring down their operating costs
without upsetting their business.
However, the average age profile and
the skill sets of employees continue
to remain unfavourable to meet the
challenges of change. The next five
years would see the average profile
of staff worsening particularly with
banks going slow on fresh recruit-
ment. Manpower planning would be
a major challenge before banks.
The current indications do not
reveal any change in the position of
banks with regard to adoption of
meritocracy. The industry level wage
settlements are bound to continue at
least during the 8th bi-partite settle-
ment (2002-07). Although, per se, this
would not impinge on staff motiva-
tion, there is a need for banks to break
away from such industry level settle-
ments. They can attract talent only by offering better pay.
Although banks have designated divisions as HRD
divisions, they continue to perform personnel administra-
tion. On the basis of current trends, it is difficult to envis-
age any paradigm shift in HR policy in banks in the next
five years. Ideally, banks should adopt the framework of
Strategic Human Resource Management (SHRM) which
aims at aligning HR strategy with business strategy.
Notwithstanding this, it can be envisaged that due
to pressures of business, banks would focus on develop-
ing skills in areas like risk management, technology,
marketing, etc. They could outsource training functions
totally thereby saving on costs. Training could also be
delivered on-line instead of the current emphasis on lec-
ture-based inputs. The emphasis will be on developing
cross-functional knowledge. The banker as known till now
will have to transform into a versatile, marketing-savvy
professional with sufficient knowledge about the prod-
ucts and services (e.g., mutual funds, insurance prod-
ucts, pension funds, smart cards, loans, private banking,
etc) competitor charges, customer preferences, and modes
of delivery.
The regulatory regime has undergone significant
changes in the recent period. Prudential regulation has
given place to structural regulation and the emphasis has
shifted from micro-management of banks to risk-based
supervision. The emphasis on self-regulation by banks
will continue. Risk-based supervision
provides for such advantages as it is
based on the mapping of the risk pro-
file of each bank and the required
supervisory responses. Progressive
tightening of prudential norms will
occur and adoption of the Interna-
tional Standards and Codes will au-
tomatically bring the prudential
norms on par with the international
best practices.
1horo s no doubt thut
tothnoogy v botomo u
koy drvor ol lnuntu
busnoss. 1ho quoston s:
\hut v bo tho noxt sot
ol tothnoogy ntutvos:
ln tho post-VkS stonuro,
bunks huvo boon ubo to
brng dovn thor oporutng
tosts vthout upsottng
thor busnoss. Hovovor,
tho uvorugo ugo prolo und
tho sk sots ol ompoyoos
tontnuo to romun unlu-
vourubo to moot tho thu-
ongos ol thungo.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 89
89
P S Shenoy (CMD, Bank of Baroda): P S Shenoy (CMD, Bank of Baroda): P S Shenoy (CMD, Bank of Baroda): P S Shenoy (CMD, Bank of Baroda): P S Shenoy (CMD, Bank of Baroda):
Around the world, the banking in-
dustry has witnessed a major trans-
formation in recent decades. In-
creased penetration, consolidation,
and international integration have
been the primary driving forces be-
hind this transformation. Developing
countries are no exception. During
the past two decades, many of them
have attempted to move away from
an earlier policy of financial controls
(as part of a broader move towards a
reduced role for the state in the econ-
omy) to face the pressures of global
competition.
In India, the process of banking
sector reform began in July 1991 trig-
gered by a balance of payments cri-
sis. Since then, there has been a pro-
found change in the Indian banking
sector in the form of introduction of new players (foreign
as well as domestic private players) and instruments,
easing of controls on interest rates and their realignment
with market rates, gradual reduction in resource pre-
emption by the government, relaxation of stipulations on
concessional lending, and removal of concessional re-
source window for financial institutions. A distinction
between commercial banks as providers of working capi-
tal finance and financial institutions as lenders of term-
finance has disappeared and both types of intermediar-
ies have responded to the change by developing com-
petitive packages of financial services covering long-term
project financing, short-term working capital loans along
with asset-based financing, equip-
ment leasing, and fee-based services.
There has been a substantial consoli-
dation of regulation and supervision.
Banks have gradually moved to in-
ternationally acceptable norms for
income recognition, asset classifica-
tion, and provisioning and capital ad-
equacy. Since November 1994, the RBI
has been undertaking an integrated
supervision of the commercial banks,
financial institutions, and the NBFCs.
Effective from April 1, 1999, the final
guidelines on Asset-Liability Man-
agement (ALM) system were intro-
duced for banks to address issues like
liquidity and interest rate risks.
While in the earlier years of re-
form, many banks witnessed erosion
in the net worth, gradually their prof-
itability showed an upward trend.
Compared to the pre-reform period,
the post-reform period is character-
ized by new products and processes
coupled with increased sophistica-
tion as the users of banking services
have become more discriminating.
There has been a clear shift towards
those banks that are able to offer prod-
ucts and services in the most innova-
tive and cost-efficient manner.
To cope with the pressures of
growing competition, commercial
banks have adopted several initia-
tives to strengthen their business
practices including, among others, greater product so-
phistication, increased customer orientation, improved
risk-management (particularly credit risk management
techniques), updated management information systems,
greater focus on e-finance channels and diversification
into newer business areas. The competition was espe-
cially tough for the public sector banks as the newly es-
tablished private sector and foreign banks had sharp-
ened their competitive edge. However, they have re-
sponded proactively to the challenges posed by the pri-
vate sector banks and there has been a significant im-
provement in their performance in terms of profitability
and operational efficiency.
Some of the proactive public sec-
tor banks have now realized that in a
new business environment, they have
to be flexible enough to accommodate
changes and at the same time have
the necessary stability to retain the
core competenci es to deal wi th
change. In the post-reform environ-
ment, the sophisticated clients choose
the well-informed and responsive (at-
tentive) banks. Therefore, the banks
now focus more on upgrading their
knowledge base in response to the
process of continuous change. In the
A dstntton botvoon
tommortu bunks us pro-
vdors ol vorkng tuptu
lnunto und lnuntu
nsttutons us ondors ol
torm-lnunto hus dsup-
pourod und both typos ol
ntormoduros huvo ros-
pondod to tho thungo by
dovoopng tompottvo
putkugos ol lnuntu
sorvtos tovorng ong-
torm projott lnuntng,
short-torm vorkng tuptu
ouns uong vth ussot-
busod lnuntng, oqup-
mont ousng, und loo-
busod sorvtos.
Somo ol tho prouttvo
pubt sottor bunks huvo
nov rouzod thut n u nov
busnoss onvronmont,
thoy huvo to bo loxbo
onough to uttommoduto
thungos und ut tho sumo
tmo huvo tho notossury
stubty to rotun tho toro
tompotontos to dou vth
thungo.
90 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
90
highly competitive environment, suc-
cess is defined by the factors like cus-
tomer relationship, product differen-
tiation, brand equity, and technology.
Therefore, there have been continu-
ous efforts to evolve both organiza-
tional structures and product offer-
ings.
Further, as domestic consump-
tion demand has become the main
driver for economic growth, retail fi-
nancial services have started playing
an important role in India. In re-
sponse to this, there have been active
efforts within Indian banks to be more
focused on consumers. According to
the latest DSP Merrill Lynch report on the Indian economy,
the changing demographic profile of India is poised to
push household consumption spending to $510 billion
over the next five years from the current level of $250
billion. This spurt in spending would certainly enhance
the banks business for retail banking products such as
credit cards, personal loans, and hire-purchase lending
in the years to come.
In India, currently, there are two types of customers
one who is a multi-channel user and the other who still
relies on a branch as the anchor channel. The primary
challenge is to give consistent service to customers irre-
spective of the kind of channel they choose to use. The
channels broadly cover the primary channels of branch
(i.e., teller, platform, ATM) phone banking, (i.e., call cen-
tre, interactive voice response unit), and internet channel
(i.e., personal computer, browser, wireless). A retail cus-
tomer selects a bank based on two criteria convenience
and relationship and would continue with a bank if it
provides good service. A customer
would leave a bank if its services
manifested errors, long wait, and in-
consistent information. For custom-
ers who are multi-channel users, con-
sistent information across all chan-
nels is the key requirement of mod-
ern retail banking.
Banks in India will now have to
work towards a vision to have an en-
hanced retail delivery system. Such a
system would include transformed
branches, enhanced telephone serv-
ices, and leading-edge internet bank-
ing functions that provide a consist-
ently positive multi-channel experi-
ence for the customer. This experience
is enabled by an integrated CRM sys-
tem built on an open IT infrastruc-
ture. The challenge before the Indian
retail banking industry is two-fold:
focus and execution. Each bank must
sharply focus on its target market-
place and rapidly execute its services.
Electronic banking services,
whether delivered online or through
other mechanisms, have spread
quickly in recent years. The impact
of e-banking is not limited to indus-
trial and the most advanced emerging economies. Even
for countries with underdeveloped banking systems, e-
banking offers an opportunity to leapfrog. Because e-
banking is much cheaper since it lowers processing costs
for providers and search and switching costs for consum-
ers providers can market banking services involving
smaller transactions to lower-income borrowers even in
remote areas. Although online-only banking has been less
successful than was anticipated, with several online-only
banks running into difficulties, incumbent banks have
started to offer banking services electronically. The threat
of new entrants has led many banks to offer e-finance
ranging from basic to fully integrated internet services.
This trend seems to have accelerated in India as well.
The recent history of financial crises in the develop-
ing countries (especially the Asian financial crisis of 1997)
has clearly shown the critical importance of sound regu-
lation and supervision as a means of defending financial
systems against distress and disorder. Though India has
implemented various reforms since
1992 to strengthen the prudential
regulation and supervision of its
banking system, we still have to build
robust prudential system which can
protect our banking sector from sys-
temic crises. For prudential norms to
be effective in a developing country
like India, they need to be relatively
simple, robust in terms of not being
highly dependent upon the working
of the other components of the pru-
dential system, and easy to verify and
Lottront bunkng sorv-
tos, vhothor dovorod
onno or through othor
mothunsms, huvo sproud
qutky n rotont yours...
1ho throut ol nov ontrunts
hus od muny bunks to
ollor o-lnunto rungng
lrom bust to luy nto-
grutod ntornot sorvtos.
1hs trond sooms to huvo
uttoorutod n lndu us
vo.
1ho rotont hstory ol lnun-
tu trsos n tho dovoop-
ng tountros tospotuy
tho Asun lnuntu trss ol
l997) hus toury shovn
tho trttu mportunto ol
sound roguuton und
suporvson us u mouns ol
dolondng lnuntu sys-
toms ugunst dstross und
dsordor.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 9l
9l
enforce. Options for further reform may include higher
capital adequacy standards, imposition of stringent re-
strictions on insider lending, explicit rules covering in-
tervention policy in distressed banks, and allowing regu-
lators the discretion to impose speed limits on growth of
credit to high risk sectors. Furthermore, there should be
greater use of the market for monitoring banks. The spread
of e-finance also necessitates changes in public policy
toward financial services. This involves setting regula-
tory and other frameworks for contract enforcement, in-
formation and privacy, and telecommunications, secu-
rity, and public infrastructure for electronic transactions.
As regards governance, commercial banks pose
unique corporate governance problems for managers and
regulators as well as for investors and depositors. It is felt
that in the case of banks, the fiduciary duties should be
owed not only to shareholders but should be broadened
to include creditors also. The bank directors need to take
into account solvency risk explicitly
and systematically when making
decisions.
The primary achievement of the
process of economic liberalization
during the decade gone by is the
macro economic stability comple-
mented by financial stability. India
has, over the years, developed a pro-
tective wall to insulate itself against
the turbulent international financial
events. However, the weaker spot
indicating vulnerability in the bank-
ing sector is the levels of NPAs which
are still not at the level of acceptabil-
ity by prudent international standards. This poses a major
challenge for the banking sector in the near future. Though
some progress has already been made on the legal front
to effect faster recovery of NPAs, as the RBI governor has
rightly said, the actual results on the ground will depend
on early resolution of potential conflict between what is
legally possible and what is practical, reasonable, and
feasible. The banks also need to develop robust internal
control systems, management information systems and
early warning triggers. Four trends are fundamentally
altering the banking industry: consolidation, globaliza-
tion of operations, development of new technologies, and
universalization of banking. Addressing the risks of glo-
balized banking is going to be the major future challenge
for Indian banks.
Ranjana Kumar (CMD, Indian Bank): Ranjana Kumar (CMD, Indian Bank): Ranjana Kumar (CMD, Indian Bank): Ranjana Kumar (CMD, Indian Bank): Ranjana Kumar (CMD, Indian Bank): In any industry,
among the various resources available, human resources
are the most valuable. It is more so in the case of service
industry like banking where the human factor is vitally
important to render the expected customer service. Com-
petitive advantage can be achieved through harnessing
the potential available in the employees by creating a
positive work culture and enlisting the support of all the
employees to the organizational goals. To this end, the
HR policy or HRM model should be so devised as to
promote mutuality mutual goals, mutual influence,
mutual respect, mutual rewards, mutual responsibility,
etc. Mutuality will elicit commitment which, in turn, will
yield both better economic performance and greater hu-
man development.
The HR management has assumed strategic propor-
tions on account of the following:
Changing business environment.
Consumer demands and the need
for flexibility.
Impact of technology.
Changing organizational structures.
The ultimate aim is to develop a well-
trained work force, flexible and re-
sponsive to customer as well as or-
ganizational demands. HRM, there-
fore, should focus on developing
skills, values, and behaviours consist-
ent with a high level of personal ef-
fectiveness in the following five
broad areas:
Technical skills which are specific
to a job.
Behavioural skills which cover traits like motivation,
judgement, resilience, and initiative as well as gener-
ic skills like communication, team working, and self-
management.
Business awareness which includes wider knowledge
relating to the organization, its key products, compet-
itors, etc.
IT skills which include understanding and exploita-
tion of IT systems to enhance business performance.
Risk management skills which relate to the identifica-
tion of risk and mitigation thereof.
With the above backdrop on HR management, some
of the HR related issues which have great significance
and which need to be addressed as part of the strategy to
achieve optimum utilization of manpower are discussed.
1ho bunks nood to dovo-
op robust ntornu tontro
systoms, munugomont
nlormuton systoms, und
oury vurnng trggors.
lour tronds uro lundumon-
tuy utorng tho bunkng
ndustry: tonsoduton,
gobuzuton ol oporu-
tons, dovoopmont ol nov
tothnoogos, und unvor-
suzuton ol bunkng.
92 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
92
With the introduction of technology on a large scale
and also on account of the changing needs of the organi-
zation over a period of time, there arise situations when
the management has to think in terms of shedding the
excess baggage or aiming at right sizing in order to achieve
the correct age and skill profiles. Under such circum-
stances, one of the best options available is an attractive
VRS package. This would give an opportunity for those
who are unable to cope with the demanding job profile
and lack the motivation to put in that extra effort required
to meet the organizational demands to ease themselves
out.
On account of introduction of certain advanced tech-
nology, there would also be a strong case for recruiting
fresh talent with attractive pay and perquisites. How-
ever, an organization cannot afford to go on inducting
talent without reviewing its existing manpower and how
worthwhile it is to continue with some of them in the
changed scenario.
Upgradation of skills through
proper training and re-training is a
sine qua non for keeping the entire
workforce in perfect readiness to take
up the challenging environment un-
folding everyday. Training is a con-
tinuous process by which the employ-
ees are honed and their skills fine-
tuned. The training policy should
ensure that all the employees, with-
out exception, are given adequate
inputs and training to equip them-
selves to be on par with the best in
the industry. Sometimes they may
have to even unlearn their past knowledge and re-orient
themselves to the present.
Even after equipping people with the latest know-
ledge, the results will not start flowing unless they are
empowered to deliver the vision of the organization. The
vision of the organization should be exciting to the em-
ployees and a source to unleash their potential. In a large
organization with a pyramid-like structure, the goals have
to be achieved not only by setting targets for the various
wings and tiers but also by proper delegation of powers
to different authorities at different levels. Empowerment
means giving employees the necessary administrative
authority to do certain tasks like hiring, transferring,
changing, training, etc. and financial authority to incur
some expenditure in the process.
Authority and accountability go hand in hand. Au-
thority without accountability is dangerous while ac-
countability without authority is unjust and improper.
While it is necessary to have some checks and balances in
the matter of delegating authority, what is more impor-
tant is the trust and faith that is being placed on them.
Every employee who joins an organization wishes to
go up the ladder. Job satisfaction does not come by mon-
etary compensation alone. Timely recognition of ones
talent and contribution in the form of promotions and
placements would go a long way in sending the right
signal to the rank and file. Any organization with a vision
for the future would have to not only draw its plans in
terms of sales, market share, etc. but also have a plan for
the organizational structure with various key personnel
and their position. The employees should be encouraged
to draw a career plan of their own and put up their re-
quirements like training, exposure, etc. to achieve their
plans. While appraising the individu-
als, the management should evalu-
ate their potential, performance, ca-
reer plans, and upgradation of skills
required. This would give the true
picture of a person and enable plac-
ing him/her in the right place. The
career plans of individuals should be
the bedrock on which the organiza-
tion builds its succession planning.
Indian Bank is a shining exam-
ple of successful HR management.
Before 2000, the bank was going
through a traumatic period with con-
tinuous net losses for over six years,
erosion of entire networth, adverse media publicity, con-
sequent low morale of staff, and a throttled decision
making process.
To revive the bank, specific programmes for differ-
ent segments of branches were designed and topics like
Credit Monitoring, NPA Management, HR Management,
Information Technology and Integrated Risk Management
were covered. Emphasis was laid on building and pre-
paring the second-line officers for leadership positions as
part of succession planning. A novel Vertical Integra-
tion programme was conducted during weekends for
branches which had been incurring losses or showing
negative trends to inspire the entire team to redouble
their efforts, re-focus their strategies, and reverse the
trend. In line with the industry trend, a VRS package was
Lvon ultor oquppng poo-
po vth tho utost knov-
odgo, tho rosuts v not
sturt lovng unoss thoy
uro ompovorod to dovor
tho vson ol tho orgunzu-
ton. 1ho vson ol tho
orgunzuton shoud bo
oxttng to tho ompoyoos
und u sourto to unoush
thor potontu.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 93
93
offered and 3,295 persons were relieved in a phased
manner to ensure smooth transition. By empowering the
Circle Heads on various credit, expenditure, and staff
related matters (including redeployment of staff to meet
VRS contingencies), the shackles on decision-making were
removed and the bank started to function with renewed
vibrancy and dynamism. Promotion process was revived
and conducted with greater objectivity and transparency
to motivate performers. In short, the bank attained a new
look mainly on account of the HR initiatives. It earned a
net profit after a gap of six years and its performance
improved substantially in 2002-2003. All the targets set
under the restructuring plan were achieved to the satis-
faction of Government of India, the owners, and RBI, the
regulators.
The future of any organization hinges on the effi-
ciency and effectiveness of its man management policies.
A transparent management with a high degree of corpo-
rate governance can alone motivate the workforce to keep
performing at the highest levels of
efficiency over a long period. To
achieve the employee loyalty to the
organization, the mutuality of objec-
tives described earlier should be de-
veloped. This can be successfully
achieved only if a proper communi-
cation channel exists among the vari-
ous tiers of the organization. People
should be encouraged to share their
views, problems, fears, dreams, etc.
so that they feel that they are being
cared for and their emotions re-
spected.
Attitude is a vital emotional trait
that triggers self-development and performance. The
success of the top management depends on its ability to
get the people with the right attitude or bringing in
attitudinal changes in the existing team to form a cohe-
sive team that ceaselessly works for the goals of the or-
ganization.
R M Nayak (MD and CEO, Lord Krishna Bank): R M Nayak (MD and CEO, Lord Krishna Bank): R M Nayak (MD and CEO, Lord Krishna Bank): R M Nayak (MD and CEO, Lord Krishna Bank): R M Nayak (MD and CEO, Lord Krishna Bank): Till the
beginning of nineties, Indian banks were led by hand by
the RBI. The process of integration of global markets and
the resultant deregulation gave freedom to bankers to
take decisions on many vital issues. Though, initially, the
banks were groping in the dark, this situation heralded
the welcome development to reshape and reorganize
banking institutions to look forward to the future with
competence and confidence.
The landscape of the banking industry underwent
considerable changes during the last decade. The indus-
try witnessed:
Deregulation of lending and deposit rates.
Entry of new private sector banks.
Extensive use of technology for product innovation
and delivery.
Emergence of retail banking and new derivative
products.
Stricter provisioning and asset classification norms.
Raising capital adequacy requirements.
Requirements for better risk management practices
and capital allocation of various risks.
Increased disclosure requirements.
Introduction of risk-based supervision.
The freedom from administered policies and gov-
ernment regulation in matters of day-to-day functioning
has opened a new era of self-govern-
ance and need for self-initiative. Ad-
herence to prudential norms on capi-
tal adequacy, income recognition, and
provisioning has caused self-regula-
tion and has laid a road map to put
the banks on strong foundations.
These measures have brought in
transparency in balance sheets of
banks revealing their strengths and
weaknesses resulting in all-round
good governance in the financial sec-
tor.
We see a consolidation phase
taking place in the banking sector
where stronger players are seeking growth opportunities
through acquiring smaller players to increase their mar-
ket share. Relaxation of FDI caps and voting rights would
further provide impetus to merger and acquisition activ-
ity. The emergence of new banks and the liberty for banks
on mobilization and deployment of resources, recruit-
ment, expansion/rationalization of branches, etc. cou-
pled with changes in fiscal policies like gradual reduc-
tion in CRR have thrown open a lot of challenges and
opportunities for the banks making them more vibrant.
These developments have necessitated professional risk
management and intense practice of good governance.
Some of the challenges that the banks are facing to-
day are:
1ho luturo ol uny orgunzu-
ton hngos on tho oll-
tonty und ollottvonoss ol
ts mun munugomont po-
tos. A trunspuront mun-
ugomont vth u hgh do-
groo ol torporuto govorn-
unto tun uono motvuto
tho vorklorto to koop
porlormng ut tho hghost
ovos ol olltonty ovor u
ong porod.
94 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
94
Changing needs of customers.
Coping with regulatory reforms.
Thinning spread.
Maintaining high quality assets.
Management of impaired assets.
Keeping pace with technology
upgradations.
Sustaining healthy bottom lines
and increasing shareholder val-
ue.
Banks are setting up alternative
delivery channels to contain operat-
ing costs like off-site ATMs, internet
banking, telebanking, outsourcing,
centralized transaction processing, etc. No doubt, the
benefits of technology have brought a sea-change in the
outlook of modern banking. Maintaining transparency
and market disclosure of critical information such as risk
profile, capital adequacy, and liquidity management have
made banking institutions more accountable and respon-
sive to the well-informed customers, investors, and pub-
lic at large. Technology has become the key driver for
enriching CRM and reduction of operating costs. Devel-
oping foresight in anticipating changing risk-return rela-
tionships, pricing banks products appropriately by
putting in place efficient asset-liability management, and
enhancing technical skills to operate modern technology
are essential for banks to face the market challenges.
All these welcome changes towards competitive and
constructive banking could not, however, deliver quick
benefits to traditional bankers on account of certain lega-
cies of the past like high NPAs and reluctance/aversion
for embracing the change. The personnel lacked training
and knowledge resources required to compete with in-
ternational players. However, the banks soon realized
that the future of Indian banking depended on the suc-
cess of their efforts to shake-off these accumulated past
legacies and carried forward ailments and how they re-
suscitate themselves to avail the new
vistas of opportunities. The earnest
efforts made by all concerned to ad-
dress the issues have caused positive
changes the enactment of SRFAESI
Act 2002 and introduction of VRS, etc.
are initiatives worth mentioning.
There is a visible change in the
mindset of the management of banks
both in public and private sector and
their workforce to adapt to the
changed circumstances for survival.
Most of the existing players felt
the need for business reengineering
to forge ahead in the growth path and
to remain highly competitive in the
changing banking scenario and took
steps to redefine business strategy
and design supporting organiza-
tional structure.
The last few years have also seen
many important changes sweeping
through the Indian retail banking sec-
tor. Instead of merely funding pro-
ductive purposes, Indian banks have taken up funding
personal consumption in a big way to meet consumer
demands. The retail banking business segment has
emerged as the fastest growing business. There is percep-
tible change in the Indian mindset and spending through
borrowing is no longer considered a taboo. The very face
of banking in India has transformed and today banks are
one-stop shops to meet all the banking and financial needs
of the consumer.
Informed customers are in buyers market now. They
are demanding greater convenience over banking trans-
actions as they have a menu of access options to choose
from. Customer loyalty is a thing of past.
To sum up, Indian banks have adopted better opera-
tional strategies and upgraded their skills. All these have
made the operational environment more volatile and chal-
lenging. They have, nevertheless, withstood all these ini-
tial challenges and have become more adaptive to the
changing environment.
P T Kuppuswamy (Chairman and CEO, The Karur V P T Kuppuswamy (Chairman and CEO, The Karur V P T Kuppuswamy (Chairman and CEO, The Karur V P T Kuppuswamy (Chairman and CEO, The Karur V P T Kuppuswamy (Chairman and CEO, The Karur Vysya ysya ysya ysya ysya
Bank): Bank): Bank): Bank): Bank): The Indian banking sector is faced with multiple
and concurrent challenges such as increased competition,
rising customer expectations, and diminishing customer
loyalty. The banking industry is also changing at a phe-
nomenal speed. While at the one end,
we have millions of savers and in-
vestors who still do not use a bank,
another segment continues to bank
with a physical branch and at the
other end of the spectrum, the cus-
tomers are becoming familiar with
ATMs, e-banking, and cashless econ-
omy. This shows the immense poten-
tial for market expansion. The expo-
1ho lndun bunkng sottor
s lutod vth mutpo und
tonturront thuongos
suth us ntrousod tompot-
ton, rsng tustomor ox-
pottutons, und dmnsh-
ng tustomor oyuty.
1ho ust lov yours huvo
soon muny mportunt
thungos svoopng through
tho lndun rotu bunkng
sottor. lnstoud ol moroy
lundng produttvo' pur-
posos, lndun bunks huvo
tukon up lundng porsonu
tonsumpton n u bg vuy
to moot tonsumor do-
munds.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 95
95
nential growth for the industry comes from being able to
handle as wide a range of this spectrum as possible. In
this complex and fast changing environment, the only
sustainable competitive advantage is to give the custom-
er an optimum blend of technology and traditional serv-
ice.
Indian banking has traversed the vicissitudes of
change from an era of controlled regime to an era of lib-
eralization, deregulation, and disintermediation. Post-
1991, the financial sector reforms ushered in a welcome
relief to the consumer. Entry of new private sector banks
with their state-of-the-art technology, sleek organizational
set-up, customer-focused approach, and competitive
spirit made deep inroads into the bastion of public sector
banks and consumers sensed the difference. Changes
have been fast and swift and the Indian banking indus-
try, to its credit, has adapted itself appreciably to the fast
changing environment. Banks today operate in a buyers
market and not in sellers market as
was the case a decade ago. The main
beneficiary of these changes is the
consumer who has never had it so
good.
With technology occupying a
pivotal role in delivery of banking
services, the expectations of the con-
sumer have also been growing.
Broadly, these expectations are swift
service with minimal response time,
efficient service delivery, tailor-made
and value-added products to suit
specific needs, hassle-free procedures
and minimum transaction costs, and
pleasant and personalized service. As
different classes of customers have different expectations
from the banks, we need to adopt a segmented approach
to study the expectations of the consumers. For this pur-
pose, consumers may be broadly categorized into
corporates, institutional clients, high net worth individu-
als, and retail consumers.
Corporates typically expect excellent cash manage-
ment services (CMS) from the banks. With the onset of
soft interest rate regime, they expect loans from banks at
sub-PLR rates as PLR rates have not moved down the
way the interest rates in the system in general and on
deposits in particular have fallen, given the high operat-
ing costs of the banks in India and their growing NPA
profiles. Loans are priced in accordance with the rating
profile of the corporates. The spreads over treasury yields
have also contracted across the rating categories in the
last few years apart from the yield on government secu-
rities.
Institutional customers may be regional cooperative
banks, small foreign banks, private insurance companies,
mutual funds, trusts, NBFCs, and provident funds. These
clients need access to places within the country where
their establishments have no network, foreign exchange
market, money market, and services related to manage-
ment and processing of receivables and payables.
The expectations of the high net worth individuals
are different and this has led to the creation of personal
banking divisions. This class of customers typically ex-
pects services at their doorsteps and investment and
advisory functions from their bankers. This has led the
bankers to turn to distribution of insurance and mutual
fund products in a bid to woo these clients into their fold.
The sophistication of corporates
and high net worth individuals has
led the banks to cater to their expec-
tations of availing banking services
over multiple delivery channels. This
has led to the emergence of internet
and mobile banking.
Retail consumers (other than
high net worth individuals) hold a
lot of potential. Realizing their im-
portance, banks have retail banking
divisions. Retail consumers may be
further sub-divided according to a va-
riety of parameters such as occupa-
tion, income, age, and geographical
profiles. The expectations of these
consumers differ according to their profiles. Agricultur-
ists, small traders and businessmen, and small road and
water transport operators expect the banks to extend
timely and hassle-free credit albeit at a higher rate of
interest.
Salaried individuals expect two-wheeler loans, con-
sumer credit loans, and housing loans. These middle in-
come groups have suddenly become important for bank-
ers as NPA levels are perceived to be minimum in this
class of clientele. Housing loans with slashed interest rates
from various banks have become the order of the day
with both public sector banks and private sector banks
wooing them alike to their fold. As these customers do
not mind spending albeit out of borrowing, credit cards
1ho oxpottutons ol tho
tonsumor huvo boon grov-
ng. roudy, thoso oxpot-
tutons uro svlt sorvto
vth mnmu rosponso
tmo, olltont sorvto
dovory, tuor-mudo und
vuuo-uddod produtts to
sut spotlt noods, husso-
lroo protoduros und mn-
mum trunsutton tosts,
und pousunt und porsonu-
zod sorvto.
96 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
96
come handy for the banks to cater to this clientele.
The only class of customers that has a grouse against
the banks must be pensioners and senior citizens who
expect the banks to pay better rates of interest on their
deposits. Given the current soft interest rate scenario and
squeezed margins, banks, at present, find it difficult to
meet these expectations. However, it has to be borne in
mind that the bank deposits offer highest safety and li-
quidity which cannot be matched by alternative avenues
of investment.
Cross-selling is a sales promotion technique in which
the manufacturer attempts to sell a related product to the
prime product that the consumer already uses. This would
make it more convenient for the customer to do related-
item shopping. In simple terms, cross-selling is the mar-
keting of many products to a customer according to his
various needs. It is all about selling more number of prod-
ucts to the same customer. The additional cost incurred
per product sale is nominal in case of existing customers.
Cross-selling happens only when we thoroughly
understand the banking needs of the customer. This iden-
tification of needs is a function of the degree of customer
relationship. The number of products
sold per customer is defined as cross-
sell ratio. Many banking companies
are losing significant revenue by not
leveraging cross-selling opportuni-
ties. Banks are not influencing buy-
ers purchasing decisions while they
shop. This is happening because they
are not providing their counter staff
with relevant information to cross-
sell as well as adequate training/
awareness to enable employees to quickly and easily cross-
sell the companys full line of products. Internal market-
ing is one of the time-tested tools of successful cross-sell-
ing. This can be done at the counter and the staff at the
counter needs to be very attentive. Cross-selling can be
at the individual level and at the institutional level as
well.
The trend for companies to shift from a product-fo-
cused view of the world to a customer-focused one has
been developing for years as products become increas-
ingly hard to differentiate in fiercely competitive mar-
kets. The better you understand your customers, the more
successful you will be in meeting their needs. But, adopt-
ing a truly customer-focused approach can be a resource-
intensive business, and many managers have questioned
how far the investment is worth it. The key to this prob-
lem, and a driving force behind the development of CRM,
is that new technologies can transform the technique of
cultivating a loyal customer base. The retail sector has
been at the forefront of using such technology.
As already noted, banks have to profile their cus-
tomers and segment them based on age/life cycle stage,
income and occupation, needs and preferences based on
customer feedback and market research. They have to
analyse the different financial needs occurring across
various life cycle stages and, accordingly, bundle out
banking products to cater to their needs so as to sustain
relationships over time.
For managing relationships with corporates, corpo-
rate banking divisions are in place. Institutional banking
is viewed as a separate focus customer segment. Institu-
tional clients such as cooperative banks, foreign banks
with a small network of branches, mutual funds, trusts,
NBFCs, and provident funds must be managed with in-
stitutional banking team.
Banks need a focused marketing approach as war-
ranted by the segment to which it caters to. Basically, the
marketing plan of banks should fo-
cus on brand building and individual
product marketing. This must be
achieved through appropriate media
planning.
The critical factors for success-
ful marketing encompass good man-
agement of branch-based distribu-
ti on, mi ni mal response ti me,
proactive and polite service, empow-
ered staff with good product knowl-
edge, ability to address customer queries, better cross-
selling of various products to existing clients, effective
lead management system for tracking prospects through
staff referrals, tele-sales, direct mailers, local campaigns,
and customer referrals. Profiling of potential customers
is done by utilizing industry-specific/trade-specific in-
formation base.
At the macro level, the success of marketing can be
monitored by gauging the increase in market share of the
bank. At the individual branch level, the achievement of
physical targets can be reviewed.
The banking sector in India has undergone signifi-
cant transformation in the past few years. A conducive
macro-economic environment, the landmark foreclosure
law, falling interest rates, ample liquidity in the system,
1ho ony tuss ol tustom-
ors thut hus u grouso
ugunst tho bunks must bo
ponsonors und sonor
ttzons vho oxpott tho
bunks to puy bottor rutos ol
ntorost on thor doposts.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 97
97
the fast spreading technological revo-
lution, and huge potential in the re-
tail segment augur well for Indian
banks. However, the numerous chal-
lenges faced by banks such as increas-
ing competition, pressure on spreads,
and systemic changes to align with
international standards have neces-
sitated a re-evaluation of strategies
and processes in order to remain com-
petitive in this dynamic environment.
The challenge is how to service
mass-market customers profitably. It
should be the business imperative to
understand a customer s expectations and appetite for
risk. The developments in the sector should improve the
cost structures of the banks. The internet has become an
accepted sales channel for financial services products.
With a population of over three billion people, the 23
countries of the Asia-Pacific region represent a rapidly
growing and lucrative segment of the global internet
market. According to the market research firm, Yankee
Group, Asia will have 374 million net users at the end of
2005. As per the International Data Corporation, the Asia-
Pacific region now accounts for about a third of the worlds
total users.
The incremental credit growth for working capital is
likely to be low as corporates restructure, reduce inven-
tories, and become more efficient. Credit growth will thus
have to come from increasing trading activity, retail de-
mand (as individuals become less debt averse, the younger
generation is more willing to take risks), and infrastruc-
ture investment (road, power, oil and gas, and upgraded
equipment to meet environmental norms).
Retail banking is the emerging phenomenon in the
banking sector. The home loans alone account for nearly
two-third of the total retail portfolio of the bank. Accord-
ing to one estimate, the retail segment is expected to grow
at 30-40 per cent in the coming years.
Housing finance is poised to register an unprec-
edented growth rate as the tax incentives are made more
attractive. A well-conceived business
plan is bound to be a sure-fire hit in
a country where the current urban
and rural housing shortage is pegged
at 7.2 million and 13.2 million units
respectively. Even a 3 per cent share
in urban housing demand at the rate
of Rs 0.5 million per dwelling unit
translates concisely into a business
level of over Rs 100 billion.
Retail finance is now being used
not just for essentials like a house or
a car but even for cruises, holidays,
etc. Travel, in particular, has emerged
as a major segment.
In the developed markets, every
corporate customer could be assigned
a skilled and experienced officer who
can handle the day-to-day banking
requirements and also act as a hub
for any specialist services the corpo-
rate may want to call on. With the support of the officer,
a suite of products tailored to suit the companys particu-
lar financial requirements could be put in place. Thus,
the banks should be prepared to offer a range of tailored
services to suit specific business requirements.
Bancassurance is not meant to make the bank a mere
vending machine of insurance products. To make it more
relevant, the banks will have to develop the skills and
take up the challenges to exploit the opportunities and
multiply their revenues. For instance, a banks insurance
team should provide a specialist service and be prepared
to work with the corporates to identify insurance require-
ments and arrange comprehensive cover to protect their
assets, liabilities, and cashflow. This might help the
corporates discover that their current insurance is inad-
equate or that they are paying excessive premiums. Spe-
cial insurance products for a selected pre-approved cli-
ent base of the bank need to be designed and aggres-
sively marketed.
A key driver of growth is innovation that surprises
and delights consumers with new, differentiated, and
relevant benefits. India will shortly become home to the
second largest number of elderly persons in the world.
The population of our elderly, at present estimated at 76
million, is expected to increase to 100 million in 2013.
Therefore, banks should focus on unmet financial needs
of the pensioners and senior citizens.
As per the census records, only
30.1 per cent of the rural households
are availing banking services. One of
the reasons may be non-availability
of bank branches in the neighbour-
hood. The existing rural branches of
many of the big banks are being
Housng lnunto s posod
to rogstor un unproto-
dontod grovth ruto us tho
tux ntontvos uro mudo
moro uttruttvo.
1ho numorous thuongos
lutod by bunks suth us
ntrousng tompotton,
prossuro on sprouds, und
systomt thungos to ugn
vth ntornutonu stund-
urds huvo notosstutod u
ro-ovuuuton ol strutogos
und protossos n ordor to
romun tompottvo n ths
dynumt onvronmont.
98 lNDlAN ANKlNC SLC1Ck: CHALLLNCLS AND CPPCk1LNl1lLS
98
closed as they have become unviable.
Banks need to think out-of-the-box
where box is the representation of all
the tested, tried things that always
worked in the past. They would have
to think outside the boundaries of
current practices, products, services,
organizations, and industries as they
fall behind the treadmill of faster and
more rapid pace of change. The new
business environment thus puts a
premium on creativity and innova-
tion more than ever before. This calls for innovative so-
lutions.
Banks may have to go for mobile banking services
for a cluster of villages. Alternatively, technological
n |h vord of caua carccnc |' dcouragng |o |r, |o
|ccp our mora and |andard and our dca hgh. Vc arc
rdcucd and aughcd a| b, |hc mar| oph|ca|c vho
procam n br||c ban|cr |ha| uch |hng arc ou| of da|c bu|
no fc vor|h vng unc |' bu| on |ru|h; and vc a,
our fc' founda|on madc of fa|h and ovc and pra,ng and
rcmcmbcr |ha| dca arc |c |ar up n |hc |,. You can ncvcr
rca, rcach |hcm hangng n |hc hcavcn hgh bu| |c |hc
mgh|, marncr vho acd |hc |orm-|ocd ca and ucd |hc
|ar |o char| h courc v|h | and ccr|an|, ,ou |oo can
char| ,our courc of fc v|h hgh dca; and ovc for hgh
dca arc |c |hc |ar |ha| gh| |hc |, abovc. You canno|
cvcr rcach |hcm bu| f| ,our hcar| up hgh and ,our fc v
bc a hnng a |hc |ar n |hc |,.
Hccn S|cncr Rcc
institutions have to come out with
low-cost, self-service solutions/
ATMs. The government and the
RBI should actively support such
research efforts. Here, it is worth-
while to mention that the adapt-
ability of the Indian rural popula-
tion to high-tech devices is one of
the fastest in the world. A wider
dissemination of information on
technologies and products to the
Indian banking industry by the re-
search institutions could benefit the banking institu-
tions. This cross-pollination of ideas would mutually
enrich the banking and the technology development
processes.
unks nood to thnk out-
ol-tho-box' vhoro box s
tho roprosontuton ol u
tho tostod, trod thngs thut
uvuys vorkod n tho pust.
1hoy voud huvo to thnk
outsdo tho bounduros ol
turront prutttos, pro-
dutts, sorvtos, orgunzu-
tons, und ndustros.
VlKALPA - VCLLML 28 - NC 3 - ILLY - SLP1LMLk 2003 99
99