The best practice can only be effective if it fits into the local setting. That’s where the new private sector banks score over their foreign counterparts.
The Indian banking industry has undergone a metamorphosis since the financial sector reforms started in 1992. Largely bifurcated till then into public sector banks and foreign banks, the sector witnessed the emergence of a new set of players in the form of the new private sector banks.
Due to the buoyancy in the economy over the last decade, banks in India have grown at an impressive pace and the new private sector banks have paved the way for efficiency in the Indian banking industry by redefining banking in India.
The new private sector banks render superior service quality at affordable costs while simultaneously bringing product and technological sophistication into the market. The service quality differentiator of foreign banks has blurred over the period and the new private sector banks have scaled up to match and better the service quality of foreign banks.
The usage of the best-in-class information technology capabilities by private banks, including client and business analytics CRM, payment platforms and Web-based delivery channels, have redefined the industry with innovations such as doorstep banking, mobile banking, universal banking, anytime, anywhere banking, and so on, all of which raise the standards in service quality.
The best practice is not always the most effective practice. To be effective, a practice has to fit the local setting. This is where the new private sector banks score over their foreign counterparts by leveraging on the domain knowledge of their local executives and the localised decision-making hierarchy and process. This leads to quicker decision making vis-à-vis a system where some, if not all, decisions need to be approved at headquarters/regional foreign locations.
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The new private sector banks also score over foreign banks in terms of branch network and customer reach. They have expanded their network by 48 per cent in the last two years against 12 per cent by the foreign banks. Combined with the reach, the new private sector banks’ local flavour helps in brand association with the customer. This automatically puts them at an advantage in terms of access to low-cost deposits.
In a McKinsey survey, on operating cost/average assets, one of the key parameters of cost competitiveness, the top five foreign banks in India are at 2.91 per cent against 1.59 per cent for the top five private banks in India.
In the same context, it is also imperative to understand domestic and foreign banks in other developed and developing countries. In countries such as the US, UK, France, Germany and Singapore, it is the home country banks that play the dominant role. Even in emerging economies like China and Russia, the scenario is no different. Domestic banks (both government-owned and private) command a sizeable portion of the total market.
The new private sector banks in India are committed to support the emerging sectors, or, the future industries of India, to make them globally competitive, as also complement the efforts by having an industry-cluster approach to extend their franchise to areas which were hitherto backward but are developing due to the industrialisation of a particular sector. With negligible presence of foreign banks in these cities, the home-grown ones have exhibited grit and are steadily increasing their coverage.
Further, the new private sector banks support new emerging businesses that not only promote financial growth but also enhance social and environmental causes across a range of their client base, constituting the economic pyramid as a whole and thus meeting wider economic, environmental and social objectives.
The recent Reserve Bank of India circular on corporate social responsibility, sustainable development and non-financial reporting on the roles of banks in India has urged banks to act as responsible corporate citizens. The new private sector banks have introduced innovative financial solutions to address a wide spectrum of issues, including sustainable livelihood, food security, climate change, clean energy, public health, education, information technology and biotechnology.
As the Indian banking sector undergoes rapid and radical transformation and growth, the challenge is not only to acquire and retain customers, but also to attract and retain talent. Most of the new private sector banks have been pioneers in establishing the owner-manager-partner model for human capital management, thereby sharing wealth through employee stock option programmes, or ESOPs, at all levels, and by harnessing employees’ entrepreneurial ability.
Foreign banks used to be aspirational employers, attracting the best young talent from business schools, but they have lost that sheen somewhat as the job roles and compensation benefits offered by the new private sector banks now seem to be on a par with those offered by foreign banks in India.
The presence of foreign banks has certainly helped in raising the overall competitiveness of India’s banking sector, raising the bar for customer satisfaction, and driven the new private sector banks to offer customised and structured products to customers, rather than the conventional lazy banking services. However, going ahead, the most successful banks in India will be those that combine visionary technology, innovative products and very competitive pricing with strong relationships and a brand built on trust and faith.
Rana Kapoor is managing director & CEO, Yes Bank, a new private sector bank