PSBs set to pip peers on tech front: Moody's

Public sector banks (PSB) will gain a better edge over their private sector and foreign peers on the technological front as they have a far larger customer base, thereby bringing down costs, according to Moody's Investor Services.

PSBs have come to realise that the only way to compete on equal terms with private sector and foreign banks is to modernise themselves by rigorously upgrading their technological platforms and systems.

Technology remains a major challenge for public sector banks, and according to Moody's, acts as the constraining factor on the upside potential of their financial strength ratings (FSRs).

The rating agency's observation comes at a time when bank stocks are on fire, having out-paced the strong gains of 72 per cent seen in the Sensex over the last one year.

Moody's, which closely monitors technological developments in the Indian banking sector, believes large public sector banks having a clearly defined technology-related strategy and vision have good chances of success.

"Most of our rated PSBs have set aside big budgets for their technological transformation, and in some instances such budgets even exceed 10 per cent of a bank's equity base," it stated. This gives an indication of the focused attention PSBs are giving in this area.

"Over the medium-to-longer term, we expect the technological advantage of private and foreign banks to gradually fade away as bigger public sector banks will eventually be able to offer matching quality of services and products, and gain a competitive advantage from a larger customer base," stated Moody's.

However, though PSBs meet the minimum Reserve Bank of India (RBI)'s requirement of computerising 70 per cent of their business, inter-connectivity among branches still remains at low levels.

As such PSBs are not in a position to offer customers the same level of service as that offered by their private sector and foreign counterparts.

Against 70 per cent of total transactions of private and foreign banks taking place outside the branches through different delivery channels (ATMs, Internet, tele-banking, etc), it is less than 20 per cent for PSBs.

Though PSBs have 80 per cent of total deposits and accounts, they have just 40 per cent of the total number of ATMs.

"Public sector banks need to adapt to the new technological environment, and deliver business value to their customers if they are to retain their huge and dominant franchises in the domestic market," stated Moody's.

PSBs not only have to update their obsolete hardware, but also need to put in place new systems and procedures that will function in line with the new platform to be installed "" something that not all banks recognised when they began their computerisation process.

Moody's is skeptical over the ability of PSBs to achieve this given the total transformation these banks are currently undergoing.

The biggest challenge for PSBs lies in networking their branches while simultaneously undergoing business process re-engineering (BPR) and installing a core banking solution (CBS).