BANKING — EXCITING GROWTH AVENUES!
It is a common assumption that the success of an organization depends on the execution of strategy. Empirically it has been proved that an equally, if not more, important factor is that the organization is in the right market or geography at the right time. Changes in the environment in fact play a vital role in the success or failure of an organization.
Change is continuous and affects organizations in various ways. Changes usually take the form of trends that affect economic markets substantially. Organizations, therefore, need to understand these trends and how they impact the economies in which they operate. These studies are best analysed and understood at the industry level. The banking industry in India is no exception.
This article looks at the changes in the business environment and the emerging trends discernible as a consequence and studies some strategies necessary to succeed in that environment as they relate to the Indian banking industry. The discussion covers the following:
- Factors that have set in force these trends
- Changes actually witnessed in the new environment
- Success strategies needed in banking to cope with these trends
Four factors are behind the changes seen in the environment – globalization; liberalization; customers; technology
- R. Narayana Murthy, Chief Mentor of Infosys Technologies, has said, “Globalization is about producing where it is most cost effective, sourcing capital from where it’s cheapest and selling it where it is most profitable.”
As Mr. Murthy says, globalization forces organizations to accept the best practices in their industry drawn from different parts of the globe. They have to adapt to and embrace global standards, practices, systems, and procedures if they are to remain competitive. Today Indian banks are very much part of the global framework.
Globalization has impacted even the rural sector and changed the manner in which banks are approaching this segment. Today, improved infrastructure and forward and backward linkages have made rural areas an increasingly attractive market. Technology has brought about new initiatives such as ITC’s e-chaupal that provide farmers greater access to information and to markets. Banks have also brought about innovations such as village knowledge centers.
The effects of globalization have also been felt in the retail segment. With the entry of MNCs, retailers have become more efficient and stepped up their marketing strategies. They have access to a much wider range of products that can be marketed locally. With retailers even in tier II cities selling products from all parts of the globe, their requirements from the banking system have undergone a change.
Growth resulting from globalization can perhaps be seen most in the 5MB segment. With goods from overseas flooding local markets, this segment had to step up its efficiency in terms of production and pricing strategies. With MNCs establishing a presence here, the opportunities to supply them with goods and services have shown a quantum jump.
It should, however, be noted that the opening up of the economy and the banking sector in particular, has been skillfully handled by the Government as well as the regulator. This brings us to the second factor that has brought about dramatic changes.
The reform process as it affected Indian banking can be traced back to the Narasimham Committee recommendations. These laid down an entirely new set of rules for banks to adhere to. These impacted the capital structure and areas of business. They have brought about dramatic changes.
One major development has been the entry of a variety of institutions into banking. Over the past five years, the distinctions between banking and other financial services have got blurred. Banks have been entering fields such as insurance, sale of mutual fund products, gold bullion, facilitating payment of bills, offering demat accounts and so on. Simultaneously other institutions, not traditionally associated with banking, are offering banking services and products. Non-banking finance companies accept deposits and finance individuals. Mutual funds, post offices and insurance companies offer many services that were traditionally offered only by banks. The entry of these institutions into the banking sector has impacted the way banking is carried out.
In addition, the liberalization process opened up the industry to foreign banks as well as the Indian private sector. This ushered in a new generation of practices, systems, methods, tools and banks themselves. While banks themselves had to cope with these changes, the ultimate beneficiaries (and rightly so) of the process were the customers. This brings us to the next factor that changed the environment.
New customer profile
In any environment, multiple choices help in empowering the customer. Indian banking is no exception. The changes in Indian banking have led to a change in the profile of the customer. Following nationalization, a whole new set of customers gained access to banks. The most economically backward person was encouraged to enter the portals of a bank branch. Along with massive branch expansion huge customer mass was encouraged to seek the help of banks. But the most dramatic change was yet to take place. Even ten years ago, banks had strict hours for business. Most bank branches opened at 10 in the morning and closed at 2 in the afternoon. Customers had to call at a branch to transact his business. Today the banker-customer relationship is totally different.
Multiple choices have empowered the customer. Today most customers of the bank do not enter the branch premises for their basic transaction needs. Transactions are done through delivery channels such as ATMs, over the Internet and even over the mobile. Many banks have introduced extended business hours such as “8 to 8” banking and “Sunday banking.”
More important, changing demographics have changed the customer profile in favour of youth with better education and qualifications. This too has changed the environment in which banks operate. Almost 100 per cent of this customer segment is techno-savvy and this brings us to the next factor that has changed the environment.
It is estimated that by the year 2011 the below 30 years age group will form a larger segment of the population than it does today. The country stands to benefit from this change. Equally important, as shown in the accompanying chart, the number of households earning $ 4,500 to $ 11,230 a year will show a CAGR of 12.4 per cent by 2011. More significantly, the segment earning between $ 11,230 and $ 22,500 will grow at 17.7 per cent and those earning in excess of $ 22,500 at 21.8 per cent. It is estimated that between 1996 and 2011, India will see an accretion of “consumers equaling the number of consumers in the U.S., every seven years.” This is both an exciting opportunity and an enormous challenge for the Indian banking Industry.
Another recent development is the growth of the rural sector as a potential segment of the economy.
The Government, corporate, the banking sector and other agencies have come to realize the potential of the rural sector. This is a burgeoning market for all types of services including financial. Technology has impacted the rural areas as much as it has changed banking in the metros and urban areas. A model based on a private-public partnership will most likely be replicated in times to come. Union Bank of India has its own experience of utilizing technology in rural areas. The village knowledge centre is established with the support of the bank and is usually affiliated to a branch for supervision. The small knowledge centre is equipped with minimum facilities including a computer with internet connection. An officer of the bank is attached to the centre and he liaises with the local population in association with officials of the gram Panchayats and other locally influential persons. He acts as a relationship manager and encourages the banking habit in villages. The main function of the knowledge centre is to empower the local population through knowledge resulting in higher productivity levels. Information is given on cropping patterns, improved seeds, fertilizers, pesticides and new technologies. Quite often, this enables the farmer to obtain a better price for his produce.
The introduction of technology came almost as a natural corollary of liberalization. Liberalization opened the doors to new players who invested in technology from the very beginning. Public sector banks followed suit. This opened up a new world of banking which benefited the banks as well as the customers. The customer was empowered to carry out the bulk of his transactions electronically without visiting the branch. It also brought in the concept of anytime, anywhere banking. As a consequence branches too became flexible in their timings trying ultimately to reach a situation of 24 X 7 services.
Technology enabled and popularized the use of plastic. This added to the freedom of the customer to access banking facilities from multiple points. Technology enabled banks to take the drudgery out of banking transactions, and allowed bank to collect and analyze data on customers and markets that would enable them to design customer centric products.
This has created a situation in which the requirements of customers – mostly composed of younger, financially upward mobile persons – are matched by the design and delivery mechanism of banks vis-a-vis products and services. Most banks are also moving towards the provision of wealth management and similar advisory services. Globalization is a natural corollary to the opening up of borders and countries. The ultimate effect of globalization will be witnessed when people operate in a world without borders. People will have a commercial world with standard practices and procedures that will enable everyone everywhere to source products and services at their most efficient price.
The ten challenges
In the backdrop of the changes experienced in the environment, the banking industry will have to face and address ten challenges:
(1) Retail renaissance, (2) seeking and servicing new markets, (3) the decision to outsource, (4) financial inclusion, (5) monitoring credit quality, (6) achieving comprehensive governance of risk management, (7) Basel II: driving enterprise-wide change, (8) corporate governance: moving to greater transparency, (9) grooming the next generation of talent and (10) consolidation.
In the coming years, the booming retail market will be another challenge that banks will have to address. Changing demographics and profiles of customers will throw up greater demands in terms of services and products that banks will have to design and deliver. Banks will also have to enter areas where they have relatively less experience and expertise. Customers will become more demanding in terms of the range of products and services. A major challenge faced by banks is that any product introduced by a bank is likely to be commoditized by being replicated by other banks almost immediately.
The twin forces of globalization and liberalization will result in a challenge as well as an opportunity. Changes in regulations and procedures, coupled with technology enable a variety of products and services to be sourced from anywhere in the globe. New skills are needed as a result of these forces. These result in new markets and customer segments emerging.
A case in point is the BPO industry, which is gradually assuming critical mass. In a more mundane sense, banks are now looking to establish a physical presence in other countries so that they can serve segments of expatriates as well as Indian industries establishing a presence abroad, more effectively.
The outsourcing option
As the habits of the work force change, banks will have to tackle the problem and make use of the opportunities available. Increasingly white collar workers are looking for ways to use their time more effectively. Leisure time and quality of life are a priority for many. They seek flexible working hours. Charles Handy has pointed out that by the year 2015 it will be the norm for most people to have two jobs. The future trend will be to have fewer permanent employees. Banks will have to face the issue of outsourcing most of the activities other than core functions that are done in-house at the present time.
The traditional ways of disbursing credit will have to be dispensed with in times to come. Bringing the part of the population that has hitherto been denied access to banking services is now an area of focus for the banking industry. It is estimated that out of every 100 only 31 have a bank account. The process of bringing these people into the banking system known as financial inclusion has been made feasible by technology. User friendly ATMs operating on a biometric identification system as well as the use of mobile phones is part of these initiatives. Today it is understood that the rural segment is becoming a market with great potential. The focus is on providing what is known as “soft infrastructure” or information and communication technology in rural areas. This expands the reach of the banking system, government as well as private and public players.
Monitoring credit quality
As banks operate in a culture of greater efficiency and meet the demands of the market place, the emphasis will shift increasingly to the quality of assets of banks. This will call for improved monitoring of the credit being dispensed. More focused and better analytics will have to be employed to ensure this. Technology can be leveraged by banks to strengthen their information systems so that monitoring becomes more effective.
In the context of the increasingly demanding environment, risk management measures assume vital importance. The aim of risk management measures is to put in place a business model based on controlled growth with proper assessment of all the risk factors involved. Banks will devise an integrated approach to risk management.
Basel II norms
The implications of globalization are felt in the movement towards Basel II capital norms. Development of new financial products, globalization of institutions is all reflected in the need for risk sensitive capital requirements. This in turn will have implications for systems in banks.
Analytics for credit appraisal, information and reporting systems, controls and other measures will have to be geared up to meet the requirements thrown up by the new accord. However, one part of the Basel II is to do with compliance it is also an opportunity for banks to improve their risk management systems and make use of capital more efficient.
Globalization and the goal of banks to operate globally will call for better corporate governance practices. These practices will enable banks to compete with international players.
The required changes will take the form of more transparent reporting. Banks will also have to put in place systems by which stakeholders will have better access to information. There will also be oversight by management, by individuals not directly involved with management but are stakeholders, by the regulator as well as traditional checks and balances such as auditors.
Grooming the next generation talent
With processes, systems, markets and the environment rapidly changing, the banking system will have to prepare itself for grooming the next generation of talent. Systems of recruitment, placement and incentivizing talented personnel will be another challenge. This will take the form of reskilling a rapidly aging work force and providing an environment that can attract and retain specialists and others in the younger generation of workers.
Further, the system will have to provide a work culture where leadership skills are nurtured. These skills will go beyond the traditional parameters of professional management and encompass the demands of today for an entrepreneurial outlook and attitude.
The way forward will call for players who will be able to approach global standards in terms of size. While the present robust growth rates in the banking industry are likely to be maintained in the years to come, if we are to reach a global scale, organic growth alone may not be enough.
The industry will have to prepare itself for consolidation. However, consolidation should result in synergies with regard to geographies, organizational cultures, technology and so on. The days ahead for Indian banks will be turbulent but interesting.
Only banks that can adapt to change and take proactive steps will survive. Understanding the emerging trends, shaping strategies based on the anticipated changes and executing them effectively will be the key to success. India’s IT industry has demonstrated that we are capable of seizing opportunities and making a positive global impact. The Indian banking industry too will one day be the subject of another global success story.