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KPMG ICC Indian Banking the Engine for Sustaining Indias Growth Agenda

KPMG ICC Indian Banking the Engine for Sustaining Indias Growth Agenda

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  • Foreword
  • Indian Banking – Emerging Opportunities
  • Funding the aspirations of emerging modern India
  • Micro, Small & Medium Enterprise – The next growth engine for banking
  • Infrastructure fnancing – building the foundation
  • The Aam Aadmi – proftably serving the unbanked and underbanked
  • Innovative and cost effective operating models
  • Big Data as a source of real time business insights
  • Public sector banks – Challenged for growth capital
  • Addressing the leadership vacuum in the PSBs

Indian Banking – The engine for sustaining India’s growth agenda

5th ICC Banking Summit Kolkata
18 May 2013


Over the past couple of years, the Indian banking sector has displayed a high level of resilience in the face of high domestic inflation, rupee depreciation and fiscal uncertainty in the US and Europe. In order to stimulate the economy and support growth of the banking sector, the Reserve Bank of India (RBI) adopted several policy measures.

© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Asset quality, capital adequacy, financial inclusion and talent management are some of the key issues facing the Indian banking industry, which despite serving the second largest populated country in the world with a total of 87 banks (including 26 public sector banks, 20 private banks and 41 foreign banks), as per the RBI, reaches out to only about half of the country’s households, scripting a nominal global footprint. The rising consumerism from the emerging ‘middle’ India and the higher purchasing power in rural India on account of rising employment provides opportunities for banks to look beyond the traditional customer segments. However, these segments would require flexible operating models which would ensure responsiveness at the last mile and at the same time be viable for the banks. On the other hand, global aspirations of Indian corporates calls for funding of cross-country acquisitions, greater sophistication in services and scaling up of resources from the Indian banks. RBI’s final guidelines for licensing of new private sector banks towards beefing up competition and garnering fresh capital for financial inclusion would roll in a timely debate on the need for consolidation vis-a- vis numerical expansion in the industry. Capital adequacy will start becoming a big issue for the commercial banks in India, as they start gearing for growth and becoming compliant to Basel III guidelines.

To meet these requirements and challenges, industry players are gradually harnessing technology with cloud computing and analytics based on big data becoming a key differentiator. The budget referendum of allowing banks as insurance brokers is also a welcome move for the industry, which will gradually forge out a financial supermarket for the customers. With tele-density (based on total number of mobile connections) standing at 74.21, in 2012, according to Telecom Regulatory Authority of India (TRAI), India can consider the Kenyan model of ushering in financial inclusion through mobile banking services, including money-transfer systems and savingsand-loans services, through a simple SMS network. Leadership and the ‘right’ talent would be very critical for banks over the next 4-5 years as they work towards achieving their growth agenda and ward off competition for talent from the new local and foreign banks. The future operating model for banks would force banks to choose their areas of differentiation and expertise rather than aspiring to be a single service provider. This paper discusses the opportunities and challenges that lie ahead of the Indian banking industry. It also touches on some possible avenues for augmenting banking penetration in the strategically placed Eastern and Northeastern states of India.

Ambarish Dasgupta

Head - Management Consulting KPMG in India

President ICC

Rajiv Mundhra

© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Acknowledgements Ravi Trivedy Kunal Pande Neha Punater Kuntal Sur Jacob Peter Aniruddha Marathe Gaurav Batra Rohan Padhi V. Ramakrishnan Natasha Wig Ankur Jain Priya Aggarwal Bhargava Pingali Divya Kalari

© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Table of Contents
01 05 11

Indian Banking – Emerging Opportunities

Funding the aspirations of emerging modern India

Micro, Small & Medium Enterprise – The next growth engine for banking




Infrastructure financing – building the foundation

The Aam Aadmi – profitably serving the unbanked and underbanked

Innovative and cost effective operating models




Big Data as a source of real time business insights

Public sector banks – Challenged for growth capital

Addressing the leadership vacuum in the PSBs

© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

which would raise its stake during the interim period. The Holdco can raise long term debt from domestic and international markets to infuse equity in the PSBs and act as an investment company for the Government of India.The engine for sustaining India’s growth agenda Indian Banking – Emerging Opportunities Raising capital for public sector banks (PSBs) — Yes. it could be a problem in the future! As per KPMG in India’s analysis. The money can be infused either through preferential allotment of equity shares or through allotment of warrants. 1 KPMG in India Analysis. capital requirements of public sector banks in the future will be based on three assumptions: • GDP growth rate of 6-7 percent our current fiscal deficit. Given creating a holding company (Holdco) and transfer its stake in the PSBs to this company. and follow this up with DVR issuance to the extent that its effective (voting rights) holding remains unchanged. Based on a paper developed for a committee on ‘Funding of Capital Requirements of PSU banks by Government of India’ © 2013 KPMG. Assuming an annual credit growth rate from FY12-FY21 at 20 percent and the annual risk weighted asset growth rate at 22 percent. the government’s intent to not dilute their stake leaves them with few options: • The Government could consider that will require credit growth of 20 percent • Basel III norms applicable to higher risk assets that banks will have to develop in the future (Micro small and medium enterprises (MSME).000 crore1. it will always have the right to control the respective PSBs due to the possession of this Golden share. Also.1 | Indian Banking . an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). . a Swiss entity. • The Government may consider in diluting its stake in PSBs through issuance of Differential Voting Rights (DVR) such that the economic stake dilution is also kept to the minimum. All rights reserved. The Government could the future on having a Golden share in each of the PSBs under which while the Government’s economic and voting stake may fall below 51 percent.60. we expect the Tier-I capital requirement for public sector banks for the same period to be in the range of INR 9. • The Government could consider avoid any dilution in its voting rights by first infusing money into the banks through issuance of normal shares to itself. retail) • Government ownership in the range of 50-60 percent. government may not be able to infuse additional capital in public sector banks.

Given the fact that over 70 percent of the market is dominated by PSBs. 6. 7 . whereas China has 4 banks in the top 10 list. 40% 10% 1% of total advances 1. the Government of India and the RBI will have to drive consolidation amongst the large PSBs to create ‘large banks’ by mandating the merger of identified banks.com/aboutus/history. Thus to achieve any consolidation. will require great political will power and many levels of dispute resolution models. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).com/features/the-week-that-was/hdfc-bank-and centurion-bank-of-punjab-to-merge/articleshow/2808784. 2. Efficiency gains will only accrue if the branch and skills overlaps of banks being merged are resolved amicably – both of which will severely test the relationship with strong trade unions and the working environment with bank staff competing to retain their jobs.5% . 4. Foreign banks are also circumspect about adopting this route as the RBI has insisted that foreign banks should meet the priority sector lending (PSL) norms including the sub-targets (not portfolio buys) in direct agriculture and small scale enterprises (SSE) lending. As per The Banker in 2012. Total priority sector lending target Export credit Agricultural advances Small enterprise advances Weaker section DRI scheme (SC/ ST) 32% 12% no target 10% No target No target Source: RBI’s notification on priority sector lending. Particulars Target (% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of off-balance sheet exposure whichever is higher) Current target (as a branch) Proposed target for WOS 40% 12% 10% [2.5% . a Swiss entity. Expect competition from foreign banks as they acquire ‘near national treatment’ The RBI announcement of a roadmap for seeking the conversion of systemically important foreign banks to ‘Wholly-Owned Subsidiary (WOS)’ was to have a better regulatory control over such banks. All rights reserved.icicibank. or through the RBI managed process of a forced amalgamation of a potentially failing bank into a strong bank (such as the post-moratorium amalgamation of GTB Bank with Oriental Bank of Commerce4 or the acquisition of Bank of Rajasthan by ICICI Bank5).e.html 4 http://www. the overall idea was to protect the tax-payer’s money being used as bail-out as was witnessed post-2008 when some of the foreign banks withdrew funds from India.hindu. Sr. and as expected. 3.indirect] Part of overall priority sector target i.com/2004/07/27/stories/2004072707340100.htm 5 http://articles. separation of ownership and management.com/2010-05-19/news/27574194_1_tayal-bor md-private-sector-banks © 2013 KPMG.The engine for sustaining India’s growth agenda | 2 M&A in PSBs will be a reality only when the Reserve Bank of India (RBI) intervenes Can two healthy public sector banks voluntarily merge to create a large bank? Considering the past record.Indian Banking . there is no Indian bank in the top 10 amongst the list of top 1000 banks of the world.indiatimes. In simple terms. The foreign banks operating in India with large networks would be keen to convert to WOS if they get national treatment in terms of opening branches in metros and tier-II cities and not just to expand branch network within the context of RBI regulations. One of the most critical challenges of any mandated merger will be linked to the integration of the two teams in the merged entity.No. occupies the third rank on the top 1000 banks of the world. while Indian banking giant-State Bank of India ranks at a low 60. the Government and the RBI will have to strengthen their resolve to manage these tricky and politically sensitive issues. KPMG in India analysis 2 http://economictimes. no! Most of the mergers in the past have been either through the acquisition of a small or regional bank by a large private bank (such as the acquisition of Centurion Bank of Punjab by HDFC Bank2 or the Bank of Madura by ICICI Bank3). 5.economictimes. This will be a significant departure from the previously stated non-interventionist policy of the finance ministry and the RBI. India critically needs at least 3 to 4 large banks that are globally competitive and can meet the growing demands for cross-border acquisitions by the Indian corporate and take on larger ticket risks on their balance sheets without hitting limits ceilings. The RBI has encouraged voluntary consolidation in the past but to no avail. Chinese banking giant-ICBC.indirect. In fact.5% .indiatimes. clear and simple resolution in the event of bankruptcy and ring fencing of the capital within the country.direct] 10% No target No target Target for domestic banks 40% no target 18% [4.cms 3 http://www. .

9 45.77 - (-) Data not available. the banking sector will have to come up with innovative operating models which will be different from the conventional ones.in/rdocs/NEFT/pdfs/RTD05012013F .6 million in January 2013 from 2. As on March 2012. Technology will be essential to access this market. Technology-driven models such as mobile banking will inevitably change banks’ operating models and help banks in lowering their cost-income ratio.3 | Indian Banking .6 Top 5 foreign banks have over 250 branches. and will have more freedom in the licensing for new branches. All data pertain to 2011 Source: RBI trends and progress 2012 and IMF’s FAS database 6 RBI Trends and Progress 2012 7 http://rbidocs. living in the provinces.1 million adults) 8.92 119. Considering the fact that foreign banks’ have been successful in garnering demand deposit in their overall deposit mix. Usage trends clearly show a significant year-on-year increase in the usage of alternate channels for transactions (ATM. The number of mobile banking transactions has doubled to 5. once foreign banks acquire domestic residency and when the major foreign banks convert to WOS.9 166.The engine for sustaining India’s growth agenda However. is neglected’. 2012) Source: RBI trends and Progress 2012 Closing the gap — financial inclusion will require innovative operating models The Economist in its issue dated 19 October 1929 carried an article highlighting that there was much truth in the observation that ‘the small man. a Swiss entity.8 Country India Australia Brazil France Russia China Mexico United States Number of ATMs (per 0. Even the number of ATMs has increased from 74505 in FY11 to 95686 in FY12. Composition of Deposits in percent (March. Break-even period for a rural branch could take upwards three years. and to enter uncharted territories and capture unsaturated segments. The banking sector has woken to the fact that there is potential in the unbanked areas.pdf 8 RBI trends and progress 2012 © 2013 KPMG. as extensive branch networks in remote regions or regions with poor physical infrastructure may not be economically viable.63 109. when the major banks convert to WOS.org.rbi. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). All rights reserved. they are likely to provide another level of competition to the domestic banks. the competition for deposits could heat up resulting in competitive pressure on domestic banks.8 152.8 million in January 2012. . The value of these transactions increased threefold to INR 625 crore during January 2013 from Rs 191 crore in January 20127. there were 41 foreign banks operating in India with 323 branches and 46 foreign banks had their representative offices in India. internet and mobile).

All rights reserved. Further. . whereas internet banking usage in India increased from 1 percent in 2006 to 7 percent in 20119. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). will enable banks to bring in a very large percentage of the currently unbanked. a Swiss entity.The engine for sustaining India’s growth agenda | 4 The internet banking channel has evolved over the years. To enable the success of this model. banks will have to very quickly build trust by demonstrating better control. 60 percent of the times basic transactions in banks were conducted in North America through online channels. into their folds. the easing of norms on using individuals as banking correspondents. coupled with the proliferation of the UID enabled account. In 2011.Indian Banking . governance and transparency in all parts of their transaction processes. Share of population group in Increment of ATMs (FY12) (%) Source: RBI Mobile banking transactions for banks (2012) Source: RBI 9 Infosys report on Consumer Internet Banking © 2013 KPMG.

India will be a country of 53. translating into 267 million people. a Swiss entity.1 NCAER defines Indian middle class as the one with income level between INR 3. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 2011 in Economic Times © 2013 KPMG.5 | Indian Banking .4 lakh-17 lakh at 2009-10 level.The engine for sustaining India’s growth agenda Funding the aspirations of emerging modern India The ‘rising middle class’ – will account for close to one third of the population in the next 20 years Middle class consumers are prominent drivers of growth and consumption in India due to their increasing disposable income. .3 million middle class households. All rights reserved. Rise in middle class Source: NCAER 1 India’s middle class population to touch 267 million in 5 yrs dated February 6. A report by National Council for Applied Economic Research’s (NCAER) Centre for Macro Consumer Research indicates that by 2015-16.

Most banks will need to start putting together strategic plans and identify teams to focus on deposit raising.2 3.9 10. . insurance. declined during the second half largely in response to the unchanged (administered) interest rates on small savings since 2003-04.8 1.5 3.3 Units of UTI 0.9 -1 0 0 0. 4. savings account (CASA) and term-deposits.9 Non.9 10. All rights reserved.3 9.5 2.3 34. In fact.5 18. Provident and pension fund 19.4 Gross financial assets 100 100 100 100 100 100 Source: Report of the Working Group on Savings during the Twelfth Five-Year Plan (2012-13 to 2016-17) © 2013 KPMG. higher levels of customer service and attractive rewards programmes. that had picked up over the years.6 6.2 Trade debt (Net) 2. Banks would have to strive hard to attract deposits in the future as the rising segment opens up to other avenues for savings and investments such as mutual funds.banking Life insurance deposits fund 3 4.5 11.Indian Banking .6 17 .3 Claims on govt.5 3.6 8.7 37 .1 9.1 19.6 40.9 11.7 0.7 Bank deposits 45. all savings and investments going to banks is not.The engine for sustaining India’s growth agenda | 6 Investment in banking products may not be the default choice for the middle class While a rise in consumption is a given. promise of better returns.7 9 7 .7 44.7 19. Period 1970s 1980s 1990s 2000s (i) 2000-05 (ii) 2005-11 Currency 13. which largely reflects small savings.8 4. real-estate and commodities.9 -0. particularly during the first half of 2000s.3 2 1.5 -0. a Swiss entity.4 14. and move from the model of servicing walkin customers. households disinvested their holdings of Small Savings during 2007-08 and 2008-09.5 Banks will have to revisit their strategies for attracting current account.9 Shares and debentures 1. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). to aggressively pursuing new customers through innovative bundling.1 2.5 10.2 11.4 15. Statistics by the Reserve Bank of India (RBI) indicate that the share of claims on the government.8 12.8 49.1 17 .9 7 4.1 10.8 -0.

From a demand side perspective. but also has an evolving appetite to take on debt for acquisition of assets and supporting their aspiring lifestyle. white goods and consumer durables. According to CRISIL. asset ownership aspirations and low perception of risk is fueling the rapid growth in demand for retail credit. .The engine for sustaining India’s growth agenda Retail credit will bloom – not all banks will be able to manage the challenges Middle class not only wields increasing purchasing power. speedier assessment of risk and rapid processing of credit.7 | Indian Banking . aggregate car and UV loan disbursements will grow at a CAGR of 18-20 per cent till 2016-17 . a Swiss entity. However. as the level of retail credit penetration is extremely low compared to other developed and developing economies. mortgages. rising incomes. Growth in Car and Utility Vehicle finance disbursements (INR billion) Source: CRISIL report on retail finance on Autos © 2013 KPMG. All rights reserved. Significant growth has been witnessed in the financing of automobiles. increase in finance penetration and higher LTV ratios will drive disbursements over the next 5 years. India has massive room for high growth in all these areas. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). The supply side (banks and NBFCs) needs to step up to this significant opportunity by leveraging credit data from the recently setup credit bureaus.A steady growth in underlying vehicle demand.

a Swiss entity.The engine for sustaining India’s growth agenda | 8 Growth in Housing Finance Disbursements (INR billion) Source: CRISIL report on housing finance In terms of housing loans.269 billion by 2016-17 . to meet these needs.0 per cent CAGR to reach Rs 4.Indian Banking . A major opportunity exists for retail lenders to develop and implement skills and tools that shall enable them to make credit pricing decisions at each individual’s level. © 2013 KPMG. shall be increasingly deployed by these banks to assess credit risk in real-time. . and aligns products and operating models. A few leading banks are likely to gain dominant market share through a focussed approach that identifies the needs of these middle income customer segments. Further. However. rather than at a product level. ownership of other financial products and behavioural data from alternate sources (such as track record of mobile bill payments etc. high prices and interest rate kept the buyers on tenterhooks and growth in disbursements fell from 22.1 per cent in 2010-11 to 16. All rights reserved. these banks shall also change their operating model to centralise credit decision and support it with innovative tools to analyse behavioural data at an individual and segment level. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).).1 per cent in 2011-12. the property prices are expected to stabilize and CRISIL forecasts disbursements to grow by 16. New risk assessment models that consider future cash flows.

Banks will have to identify the niche customer segments in the middle income class – those seeking higher value loans. gold loans from banks have increased at a CAGR of 57 . Banks dominate this market with a share of 72 percent in total gold loans as of March 20123. All rights reserved. RBI. . It is very likely that NBFCs will continue to dominate the market for customers seeking small ticket and high flexibility loans.9 | Indian Banking . small businesses that need capital for expansion – that they have the power and model to address.html 3 Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs.thesmartceo. January 2013 © 2013 KPMG.5 percent and NBFCs have increased at a CAGR of 98. share of banks in total gold loans is the highest. Share of banks and NBFCs in gold loans outstanding (in percent) Source: “Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs” .The engine for sustaining India’s growth agenda Gold loan business will continue to thrive in the future – banks will have to fight for their niches India has among the largest consumers of gold with an annual consumption of 900 tonnes2 and the middle class is waking up to the fact that taking a loan against gold is relatively easy due to its high acceptance as a collateral and liquidity. Among the segments of gold loan market. a Swiss entity. it seems that NBFCs account for the majority of gold loans disbursed. where the speed of disbursement and flexibility of repayment terms will be of less importance when compared to size of loan and other bundled services. Organized gold loan market has grown at a robust CAGR of over 55 percent in India during FY 2008 to FY 2012. January 2013 2 http://www. This segment focus will enable banks to build a branch led operating model. RBI.in/growth-enterprise/the-golden-eye.3 Gold loans disbursed by NBFCs have witnessed rapid growth in the recent past. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).5 percent during the same period. Therefore. However. contrary to the popular belief.

an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). if their point of contact is someone they trust. 5 http://www.iibf.The engine for sustaining India’s growth agenda | 10 What will the emerging middle class seek? Will banks be able to provide? The new middle class is likely to be fickle in its banking relationship – given the very low costs of. According to a study. The key to building and profiting from a longterm relationship with this segment will be the ability to build trust over a series of transactions. . The current trend in banks of disproportionately rewarding the ‘aggressive seller’ of fee based products and services will thus need to be replaced with rewarding relationship sustainers – those who balance a holistic view of customer profitability with equally high customer satisfaction ratings. not only in the nuances of the products and services they sell.asp © 2013 KPMG. but also in the development of soft skills and trust building skills.org.5 A key aspect to this challenge will be the bank’s ability to build and retain a team that is trained.in/scripts/monthlycolumn_july. All rights reserved. a Swiss entity. and multiple available options for.Indian Banking . The emerging middle class is likely to value the relationship higher. switching. about 69 percent of the customers in the high and upper middle income group would tend to remain with their bank when choosing to buy a financial product even if the bank did not quote the best price.

5% Source: MSME Census . The overall contribution of this segment to India’s Gross Domestic Product (GDP) has been holding steady at 11. about 60. Small and Medium Enterprises. metals etc. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). IFC Intellecap Analysis 2 Report of the Working Group on Sick Micro. All together the MSME segment accounts for 45 percent of the country’s industrial output and 40 percent of exports. there were around 29. In 2009-10. Out of these.5% 1. Cooperatives Private Limited.1 Under a broad categorisation. Small & Medium Enterprise (MSME) sector is a major driver of growth for the Indian economy.2% 0. Small & Medium Enterprise – The next growth engine for banking The Micro.11 | Indian Banking . 1.8 million registered and unregistered enterprises (as classified by the banking definition of companies with a turnover in the range of 20 to 200 crores) across various industries. trade. IFC Report on micro-small and medium enterprises in November 2012 1 MSME Census.8% 3. textiles. a Swiss entity. approximately 77 percent of the total turnover of the MSME sector is linked to various industries in the manufacturing sector (agri and food products. Public Limited Others Share of MSME enterprises 94. Ownership structure of enterprises in the MSME Type of structure Proprietorship Partnership. Reserve Bank of India (RBI).5 percent a year2.000 are public or private limited companies. 2009-10 © 2013 KPMG. IT etc). . the MSME sector faces a chronic shortage of bank financing to aid its growth and improvement agendas. All rights reserved. retail.The engine for sustaining India’s growth agenda Micro. maintenance.5 million are partnership companies and the rest are proprietorships.) and the balance is contributed by the entities linked to the services sector (agriculture. And yet. There are another 30 million micro enterprises in the unorganised sector.

reduces addressable demand considerably. in which banks have the largest share (approximately 85 percent). To encourage greater bank led financing. All rights reserved. . informal financing. Working capital financing. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).Intellecap analysis Only one third of the MSMEs have access to organized financing channels in India The slow growth of MSME is broadly attributable to the lack of financing or lack of facilities and skills. The MSME industry clusters in these states are varied and range from the trade and metal processing centres in Orissa. 3 IFC report on MSME © 2013 KPMG. By any stretch of imagination. and to a lesser degree debt for capital expenditure are the two key offerings sought by MSMEs. Given the high growth aspiration levels of MSME promoters. this unmet demand presents a significant opportunity for the flow of banking credit.The engine for sustaining India’s growth agenda | 12 Distribution of enterprises in the MSME sector and prevalent ownership structures Source: MSME Census. The risk perception attached to unregistered or unorganised enterprises due to a lack of transparent financial data. However. a Swiss entity. IFC . given the significant demand-supply constraints. the financing chasm has grown. limited immovable collateral and lack of credit assessment skills of some sub-segments and the preference for ‘less hassled’. 22 percent of this amount is the debt financed through the formal sector.Indian Banking . prefer to raise financing through personal channels (friends.50. family.000 crore (USD 650 billion)3. It is estimated that only 33 to 34 percent of the MSMEs had any access to bank or institutional financing channels and in the absence of this finance. Jharkhand and Chattisgarh to forest product and handloom related centres in the North Eastern states. Small Industries Development Bank of India (SIDBI) has estimated the overall debt finance demand of the MSME sector at INR 32. both are debilitating factors. Most of this debt flows to the registered enterprises. MSMEs in Eastern Indian and particularly North Eastern states have been lagging behind the other states in terms of access to financing from the banks. Low access to infrastructure and electricity and roads has significantly hindered the growth of the MSME industries in these regions and consequently their access to organized lending from banks. the Reserve Bank of India (RBI) had increased its focus on this sector through directed lending policies such as priority sector lending (PSL) norms. informal financiers etc).

banks have an opportunity to grow their credit exposures. © 2013 KPMG. a Swiss entity. rather than niche segmentation of the market • Limited market assessment skills at branches (and limited ability to gather and analyse proxy data) • Centralised product design rather than customised products that address the needs of specific subsegments • Vanilla models of fund based products and limited credit assessment skills for knowledge based industries with limited immovable collateral. Many such banks tend to narrow the definition of such enterprises (investment in assets) rather than seek a broader definition that could include revenues. the indirect lending portfolio earlier used by banks who lent to NBFCs to further lend to MSMEs. All rights reserved. it is no surprise that PSBs account for over 70 percent of the debt financing to this sector. . Given the significant variance in MSME knowledge. rather than as an opportunity. past cash flows etc. order flows. Reserve Bank of India (RBI) is creating an impetus for banks to finance As awareness of formal financing opportunities grows within the addressable parts of the MSME sector.13 | Indian Banking . to meet PSL norms.The engine for sustaining India’s growth agenda Arunachal Pradesh Arts and Craft Weaving Cane and Bamboo Assam Tea Tourism Traditional Cottage Industry Manipur Handlooms Handicrafts Sericulture Food Processing Meghalaya Food Processing Horticulture Mining Nagaland Bamboo Food processing Horticulture Mizoram Bamboo Energy Sericulture Tripura Food Processing Bamboo Handloom Handicrafts Bihar Food Processing Rubber and Plastics Transport Equipment Chhattisgarh Food Processing Gems and Jewelry Iron and Steel Jharkhand Mining/Iron and Steel Rubber and Plastic Handloom Orissa Iron and Steel Aluminum Handloom Source: IBEF . limit risks and seek better spreads by developing and implementing MSME sector specific policies and operating models. The regulatory framework defined by the RBI (and recently strengthened by the Nair Committee report) has set targets for banks to achieve in lending to the MSME sector (7 percent to 15 percent of lending portfolio to be allocated for financing micro enterprises) and an overall 40 percent of their annual credit to be allocated to priority sector lending. Many banks also treat credit to this segment as a necessity for meeting compliance norms. the Nair Committee has also sought to limit to 5 percent. extensive branch network linked liability relationships and regional versus centralized credit assessment skills between public sector banks (PSBs) on one side and private and foreign banks on the other. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). IFC – Intellecap Analysis While challenges for financing this sector continue. traditional challenges of bank financing of MSMEs remain: • Broad. Further. However. while private and foreign banks account for 22 percent of credit flow.

specialised knowledge of the MSME. enhancing credit guarantee coverage. By creating specialist credit capabilities for each sub-sector. Linking personal and small business accounts has enabled many banks to develop a close link with promoters and proprietors. LCs/guarantees and debt. banks have been able to reduce their credit risks substantially through the modulation of credit flows based on knowledge of business cycles. Co-write credit with a trusted Non Banking Finance Company (NBFC) partner. and NBFCs providing subsidiary debt. Legal and regulatory framework – such as a single consistent definition of the sector. 3. extending the Securitisation Asset Reconstruction and Enforcement of Security Interests (SARFAESI) coverage. The advantage of this model is that both partners leverage their respective strengths (banks’ ability to provide an envelope of services such as forex hedging. this model shall become more attractive. a Swiss entity. enhancing advisory support. The availability of data linked to personal accounts provides good insight to support credit decisions to this group. 2.The engine for sustaining India’s growth agenda | 14 Banks will need to develop multiple operating models and goto-market strategies for the MSME market Banks need to work with SMEs linked to the supply chains of their large corporate customers and leverage this relationship to better manage and control credit exposures. local collections capability and other non-banking services). supporting the growth of venture funds. b. where first lien on collections remains with the bank. Segmentation of customers Source: KPMG in India analysis © 2013 KPMG. Cluster based financing has already been demonstrated successfully by some banks by focussing on small sub-sectors that are geographically concentrated into specific areas and have very similar market cycles and supply chain linkages. creating a single collateral registry for immovable assets. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Governmental support – such as providing platforms for market linkages. supporting Asset Reconstruction Companies (ARCs) etc. technology upgradation and promoting cluster development. . skills development. Given the recently imposed limits on indirect financing. securitisation of trade receivables through conducive legal infrastructure. All rights reserved. expanding the coverage of credit rating agencies. Strengthening of support infrastructure a.Indian Banking . Many banks have successfully implemented supplier and dealer financing products and processes and will seek to increase penetration deeper and across a larger number of corporate clients. 1.

All rights reserved.15 | Indian Banking . India needs significant investment in the infrastructure sector. Planning commission has projected infrastructure investment of more than INR 40 lakh crore in the XIIth 5-year plan. © 2013 KPMG. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). the investment requirement in infrastructure is expected to grow at CAGR of 14. which is nearly twice that of the XIth 5-year plan. there exists an immense need to setup basic infrastructure across the country As per the Planning Commission’s XIth and XIIth 5-year plan. . a Swiss entity. In order to sustain the long term growth momentum.The engine for sustaining India’s growth agenda Infrastructure financing – building the foundation Given India’s size and relative under-development.6 percent from FY 08 to FY 17 .

All rights reserved. KPMG in India analysis © 2013 KPMG. Public/ Private investment break-up (at 06-07 prices) Source: Planning Commission. a Swiss entity. have not seen the required traction in the first year of this plan. KPMG in India analysis However.5 lakh cr for FY13-FY17 . the overall debt requirements (disbursement potential) is expected to be INR ~14.The engine for sustaining India’s growth agenda | 16 Infrastructure investment. Significant private sector investments are required for bridging infrastructure investments gap and meeting revised targets by the Planning Commission. private investments which are required to increase significantly to INR ~20. .FY17 (at 06-07 prices) Source: Planning Commission. FY08 . an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).3 lakh cr.Indian Banking . Considering the 70:30 debt to equity ratio.

environmental clearances. with quicker commencement of commercial operations as compared to power projects.e.Investment in Storage does not include investment requirement in land . reluctance of promoters to invest additional equity. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). All rights reserved. and specific issues like lack of reliable fuel supply or issues in land acquisition have increased risk in the largest infrastructure sectors i. right-of-way clearances and occasional resettlement problems with local population. in order to have clear visibility of project cash flows prior to sanction. power and roads As of April 2013. . today they require a signed Power Purchase Agreement (PPA) as well. primarily land acquisition. Contrasting with the scenario of 2009-10 where lenders would sanction funding to projects with the assumption of eventual signing of Fuel Supply Agreements (FSA). The roads sector has also faced a number of issues on the regulatory front. a Swiss entity.Numbers corresponding to the bubbles indicate financing opportunity in INR cr © 2013 KPMG. Roads have traditionally been considered a lower risk sub-sector within infrastructure. several power sector projects are stalled due to the lack of assured coal supply leading to unseen levels of risk averseness amongst lenders. However. Opportunity mapping across sub-sectors within infrastructure shows the current balance of risk and attractiveness as perceived by lenders in infrastructure finance Source: KPMG in India analysis Note: .The engine for sustaining India’s growth agenda Policy inaction. significant deviations in toll revenues in recent times have forced lenders to restrict disbursements even to sanctioned projects based on the increased perception of construction and operational risks. This has led to intensification of competition amongst road developers and aggressive bidding to win projects.17 | Indian Banking .

the scheme experienced limited success since the government restricted IIFCL from continuing to fund the project after the lead bank exits. who have access to long term funds. Banks had been the mainstay for infrastructure funding during the XIth plan period. In April 2013. a Swiss entity. bank finance to the sector is of critical importance and the banks have currently taken a cautious approach as they are experiencing portfolio stress Approximate total supply XIIth Plan Period IFCs Banks – fund based (Direct to clients) Primary debt funding Source: KPMG in India anaysis 450. nearly 100 percent of such issues are raised through private placement. Several key reasons exist for banks’ reluctance in further funding. holding company debt. primarily a result of strict regulatory capital standards for products deemed riskier by RBI.000 750. with minuscule participation from nonfinancial private issuers. Most banks have already reached their internally approved sector-wise exposure norms. Infrastructure developers have raised money in foreign currency at a significant cost advantage. etc. however they continue to remain wary of global group policies of the lending banks which had created issues in the sector in 2008. Indian banks are wary about innovative structures as is evident from long cycle time for sanctions. Without this key avenue for diversification of funding sources away from the bank dominated financial system. Limited availability of take-out finance is leading to the asset being on the bank’s balance sheet longer than expected. Also. However the banks are taking highly cautious approach towards lending to the infrastructure sectors. the banks have limited appetite for complex structures. Nearing the end of their equity investment capacity. All rights reserved.000 INR Cr. The government is considering relaxing these rules which could help the state-owned IIFCL provide longer-term funding to such projects at economical terms. liquidity and price efficiency of debt issues. Developers are willing to accept a higher cost for structured products. which are more popular with NBFCs for smaller deals. mezzanine debt. Additionally. with nearly no secondary market in place to encourage market-making. Insurance companies. a committee comprising finance ministry officials was setup to make takeout financing work better.The engine for sustaining India’s growth agenda | 18 Due to lack of depth in the corporate debt market. viability gap funding. The takeout financing scheme introduced in 2010 by the government through Indian Infrastructure Finance Company Limited (IIFCL) sought to assist banks in avoiding an asset-liability mismatch and also free up funds to finance new projects. © 2013 KPMG. The lack of depth in the corporate debt market in India restricts the channelization of capital flows towards the infrastructure sector. Smaller NBFCs and foreign banks active in this space have demonstrated a more nimble and fast-moving approach towards closing deals of this nature. are restricted by regulator-imposed sector investment limits which further restricts the flow towards infrastructure projects. However. The corporate bond issuer profile is dominated by banks and public sector companies. . Difficulties in recovering dues from promoters due to stalled projects not generating revenue has increased the overall portfolio stress. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). infrastructure developers are finding it difficult to raise long term money efficiently from the capital markets.000 350. The current supply constraint has led to the rise of External Commercial Borrowings (ECBs) as a competitive alternate source of supply. increasing number of developers are looking for options such as quasi equity. These products remain significantly higher yielding than standard project loans or corporate term loans. especially for the power sector.Indian Banking .

an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).FY12** Source: Central Electrical Authority (**) As on 30 June 2011 © 2013 KPMG.The engine for sustaining India’s growth agenda Owing to inherent benefits and significant potential.19 | Indian Banking . . a Swiss entity. and increasingly in wind energy generation has created a niche space for financiers who have cultivated technical expertise amongst their personnel. the government is taking several initiatives to drive growth of renewable energy sources Installed capacity . Renewable energy capacity mix .renewable energy* Source: Central Electrical Authority (*) As on 31 December 2011 The evolving process maturity amongst developers in solar. All rights reserved.

250 18500 135500 94850 Source: KPMG in India analysis At a per MW cost of INR 13 cr based on negative movement in currencies.000 Debt requirement (INR Cr) 46. . © 2013 KPMG.000 4. Banks have been the mainstay of the infrastructure funding through direct and indirect routes however they have taken a highly cautious approach in the recent times as they are experiencing significant stress on their portfolio due to underlying business issues. Infrastructure financers are keenly pursuing funding opportunities in the emerging segments and are bringing in product structure innovations which may prove to be key growth drivers in this challenging environment. Conclusion A significant proportion of the infrastructure investment is expected to come from the private sector. starved of opportunity due to management reluctance to fund conventional energy. renewables are expected to be a crucial focus area for banks and Infrastructure Finance Companies (IFCs) alike.200 36.000 52.000 Benchmark cost (INR Cr/MW) 6 13 Total investment requirement (INR Cr) 66.500 5 17 . All rights reserved. a Swiss entity. infrastructure finance would remain a tough proposition for the financers. Despite this fact. Unless government takes strong policy measures addressing the supply constraints.The engine for sustaining India’s growth agenda | 20 Several financial institutions are flocking to the opportunity represented by renewable energy due to the overall cautious stance on thermal sources of generation Energy source Total capacity to be added during XIIth Plan (MW) 11. approval delays and creates enablers for infrastructure growth.Indian Banking .400 Wind Solar Other RES (Biomass + Small hydro [<25MW]) Total 3. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). deal sizes are still small compared to conventional power sources.500 12.

growing at ~ 6.000 and above has increased to 37 percent in 2011 as compared to ~18 percent in 2001 with maximum growth being seen in the higher income brackets.The engine for sustaining India’s growth agenda The Aam Aadmi – profitably serving the unbanked and underbanked Rural opportunity is large and growing Rural India constitutes 69 percent of the total population and drives about half the GDP of the country. However. a Swiss entity. it has been observed that its per capita GDP has grown faster than its urban counterparts.7 percent for urban India. KPMG in India analysis © 2013 KPMG.1 1 How India earns and spends. The proportion of the rural households earning an income of INR 90. All rights reserved. signaling higher productivity growth. NCAER. .21 | Indian Banking . an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).2 percent since 2001 as against 4. a ratio which has mostly remained unchanged over the past ten years.

All rights reserved. Some of these are as below: • Lack of adequate credit • Limited collateral: Assets ownership is limited and generally restricted to farm land with lack of clear title and documentation. trading. complexity: Operational costs are higher on account of low ticket sizes. a Swiss entity. As a result of which.Rural households (mn) Source: How India earns and spends. transportation. © 2013 KPMG. Rural India accounted for only 9 percent of the total deposits and ~10 percent of the total credit of the banking sector in 2011 with a large number of rural households having no access to formal sources of credit. improved rural infrastructure like roads. however.3 Various challenges inherent in rural finance have led to inadequate access to financial services for the rural population. NCAER . In addition to rising rural incomes.The engine for sustaining India’s growth agenda | 22 Income pyramid . 2012 3 RBI Basic Statistical Returns. there is still a huge demand supply gap for banking services. Access to banking services is still constrained despite the size of the pie In the backdrop of this growth in rural India. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). which leads to increased complexity and risk of operations.Indian Banking . A holistic approach to rural India would therefore require understanding the non-agro space as well which includes activities such as manufacturing.CMCR analysis. this sector becomes a high risk segment for banks to finance. construction etc. The share of agriculture in rural GDP has reduced from 42 percent in 2001 to 27 percent in 20112. • High operational costs and 2 Credit Suisse Report on India Market Strategy. low population density and higher cost of due diligence. power and telecom has also contributed to growth of the rural economy. • Diverse profile: The sheer diversity of the Indian rural landscape poses significant challenges as the customer profile and banking needs vary across regions. KPMG in India analysis The profile of rural economy is also changing fast and is getting increasingly diversified and moving beyond agriculture. In addition. the rural economy is largely a cash economy. . KPMG in India analysis information: Credit information for rural customers is usually constrained as the penetration of credit bureaus is not strong and the borrowers possess limited documentation in terms of proof of income.

tobacco. The product terms need to be communicated clearly and in a transparent manner. There are several instances of BCs opening a large number of accounts which continue to stay inactive and ultimately become dormant. Leveraging technology Technology enabled solutions can go a long way in developing low cost and efficient delivery channels for rural India. where the farmer is obligated to sell his produce to a sugar mill in the vicinity. The same model can be extended to other commodities that have strong value chain linkages e. disbursement and collections in a cost effective and efficient manner. Harnessing and developing local talent A key challenge in rural markets is information asymmetry due to lack of documented information. The farmer’s cash flows are dependent on the sugar mill. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). and are being experimented with. Banks need to work on developing a comprehensive product suite including credit that can help BCs engage the customer all year round.g. .based technologies are likely to lead the way as mobile consolidates its position as an ubiquitous connectivity device.The engine for sustaining India’s growth agenda Tapping the rural banking opportunity requires an innovative approach The traditional banking model has clearly not worked in rural India due to its high cost structures and ineffectiveness in adapting to the requirements of rural customer. mobile-based technologies etc. A gold loan is a good example of a highly simple and effective product to meet the credit needs of the rural customers. Several commodities and agricultural produce have a strong well developed value chain. The product can be delivered quickly in a decentralised environment. Targeting youngsters is also a good idea as they are likely to be the future customers and are also strong influencers in adoption of new technologies in the household. Tapping the rural opportunity would require banks to focus on the following few things: Developing simple products Rural customers would typically have basic needs which can be met with simple plain vanilla products with minimal additional features and options. Business Correspondent (BC) channel has a strong potential to deliver technology enabled low cost solutions. Low cost innovative delivery models Several new alternative channels are emerging as against the traditional branch-led model.23 | Indian Banking . wherein the linkage of the farmer to the end buyer can be tapped to create a financing opportunity. Experiential marketing is a good way to encourage the usage of new technologies and banks should focus on making customers comfortable with new technologies with a sustained campaign. requires very limited documentation and provides the security of collateral like gold. There are several technologies which have already come up in the market – low cost ATMs. However. A good way to overcome this challenge is to tap the local talent which brings in immense local knowledge and relationships which can otherwise not be accessed. and the repayments for any loan to the farmer can be collected out of the money that the sugar mill owes to the farmer at the time of harvest. point-of-sale terminals. milk and other crops where contract farming model is being adopted. Local talent is also likely to be much more stable against talent brought in from larger cities. the BC channel is only a means of delivering service and the banks would still need to work on product and market development to make the BC model sustainable and effective. Mobile. The model helps banks leverage the long standing relationship of sugar mill with the farmers to do appraisal. A case in point is sugarcane. Banks therefore need to actively develop the local talent base and use it as a hiring ground. a Swiss entity. Another low cost delivery model is supply chain linked financing. The key to success lies in early adoption by the customers and banks need to work extensively towards customer education and awareness. © 2013 KPMG. All rights reserved.

It is time now for the banks to change their outlook towards rural banking from a regulatory obligation to a commercial opportunity. With substantial investments going into rural markets. developing a sustainable business model has therefore become a key imperative. a Swiss entity.The engine for sustaining India’s growth agenda | 24 Banks need to bridge the gap between regulatory obligation and commercial opportunity Rural India presents a significantly large opportunity that is still at a nascent stage of being tapped by the banking industry. © 2013 KPMG. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). All rights reserved. .Indian Banking . We have witnessed similar waves of transformation in other industries like telecom where a deep market penetration has been achieved driven by industry efforts rather than a push for universal service obligation. Recent regulatory interventions have required banks to penetrate deeper in rural markets with ultra small branches in villages with population as low as 2000.

and/or cost structures can deliver big benefits—but is not easy to achieve. The determination of whether the business model can be modified to increase its adaptability to market and client needs is one that has to be made at the top of the house. processes and functions with other processing leading capabilities. • Redesigned business operating that combines in-house capabilities. A responsive target operating model will be the need of the hour. a bank’s target operating model should encompass the following guiding principles: • Operation and technology should be • A joint venture or consortia structure highly automated. low cost. Indian banks are being forced to constantly review and revisit their operating models. All rights reserved. • Operations and technology should be extendable to other parts of the business. technology led disruptions and higher shareholder expectations. © 2013 KPMG. . The resulting changes are making Indian banks nimbler. regulatory interventions. models should separate generic products from higher margin products in order to leverage scale and cost efficiency for generic products and to focus on revenue and margin for complex products. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). scale. robust and scalable. better focussed on customer services and witnessing better returns through fee based services and products. a Swiss entity.The engine for sustaining India’s growth agenda Innovative and cost effective operating models With increasing competition.25 | Indian Banking . emerging customer demands. more cost efficient. • Combining functions (as in factory and or utility models) and costs across multiple products/ services and territories can eliminate products/ service and geographic silos. Based on the firm’s business strategy and changing market dynamics.

or the firm may appear unresponsive if a poor service level agreement (SLA) is in place. Some domain knowledge may be lost. Outsourcing relationships are moving towards partnership models with key service providers.Indian Banking . and Middle Eastern markets. The drawbacks are the cost of excess capacity when volume trends down and duplicative functions and systems.The engine for sustaining India’s growth agenda | 26 Can operational functions be standardised or combined? The virtues of product-centric models are clear: faster time to market (especially for products such as derivatives). a Swiss entity. High cost: extensive duplication of functions and systems + Greater processing efficiency + Any single product throughput may be limited + Can more effectively leverage STP - Can appear unresponsive if a poor SLA is in place - Can lose domain knowldege Source: KPMG’s Rethinking operations . an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). consist of systems and staff. consortia) are being considered as a way to lower transaction costs in Asian. These are risks. These may include two or more banks in partnership with a service provider in order to develop a key product capability using technology as an enabler.A closer look at operational transformation. in terms of technology assets and operations. + Faster time-to-market for product + Strong product domain knowledge + High single product throughput possible - “wasted” excess capacity as volumes fluctuate . . 2012 and KPMG in India analysis Alternate Partnership Models Alternate partnership models are sparking interest. strong product domain specialization. All rights reserved. © 2013 KPMG. and single product throughput may be limited. process-centric models offers greater processing efficiency that can more effectively leverage straight-through processing (STP) to conduct the entire capital markets trade and payment process electronically ( the ‘industrial’ methodology many are moving to). In contrast. where collaborative models (joint ventures. This is certainly true in emerging markets. Excess capacity. European. however. and high single-product throughput are obvious benefits.

a Swiss entity. it is highly imperative to undertake a comprehensive risk assessment exercise and plan carefully before shifting processes to digital/self-service mode. by simultaneously changing processes and organisation structures. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). and thus will be able to measure the benefits of the effective use of new technology for improving customer-facing as well as internal processes. Disparate technology platforms and processing systems within a bank make it difficult to achieve this in a seamless manner. the customer interface and all support systems.The engine for sustaining India’s growth agenda Optimizing the use of technology as the change agent While many banks have invested in core systems and horizontally integrated operations centres. Leading banks will be able to take a holistic view of implementing new technologies. Tally etc. the success of the ATM channel and increasing usage of internet and mobile banking is clearly evident. Leading global banks have focused on providing customers with more self-service options for carrying out all banking activities. by redefining the underlying process. All rights reserved. Only a few banks have successfully transitioned a customer service to the internet. In India. some of which can be conveniently automated from start to finish. STP can be extended to customers as well with most banks integrating their online platforms with the financial systems of customers such as SAP. Enhanced focus on digital banking and self-service channel usage to reduce the cost of operations Straight Through Processing (STP) will be a key determinant for process efficiencies © 2013 KPMG. . is a key contributing factor to high costs and inefficiencies of banking operations.27 | Indian Banking . Lack of end-to-end automation of transaction and service processes. Banks need to drive STP through the adoption of technology enablers such as imaging and workflow systems and reconfiguring processes. most face challenges in extracting value from investments in technology. Many banks have struggled in this effort as they tried to replicate a branch based or paper based process onto the internet channel. Oracle Financials. However.

a Swiss entity. cope with the heightened business and regulatory demands. and deliver a comprehensive. The target operating model hence developed should be flexible enough to handle the complexities and uncertainties. All rights reserved. To provide an example.Indian Banking . leading banks in Australia have adopted an owner/entity end-to-end total responsibility model similar to the role of a brand manager in the FMCG context. roles and operations scope of their branches by making available multiple channels inside branch premises. focusing on customer awareness and on complex transactions which require a very high degree of customer advice and interaction. but surprisingly also for a number of younger urban and semi-urban consumers. Globally. highly fluid market environment. The banks rated high on customer service satisfaction levels will have adopted an operating model that would have processes organised by relevant customer segments. . Customer centric operational realignment with requisite technological support is imperative for this to work effectively. banks are trying to model their operations around customer centricity taking a cue from the fast-moving consumer goods industry. Leading banks are already experimenting with the formats. The branch will remain a significant channel of choice not only for older and less technology-savvy customer segments. Leading Indian banks are expected to reconfigure their service delivery model and processes and institutionalize new customer centric behaviours through the management of new skills in employees. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). without the need for request routing and multiple iterations and interactions.The engine for sustaining India’s growth agenda | 28 Branch will continue to play a core role in the operating model. Customer as the focal point of the operating model © 2013 KPMG. integrated service package to each customer segment with clearly defined ownership and accountability. A First-TimeResolution (FTR) approach will need to be adopted across the bank to help ensure servicing of customer requests and handling of customer requirements at the first node of contact. although in a different avatar Leading banks have realized that branches will continue to be highly relevant. albeit with a significant role change. many of whom value face-to-face interaction and personal touch while availing complex or investment-led financial products for the first time. changing customer expectations and preferences.

All rights reserved.29 | Indian Banking . cloud computing and a rapidly increasing digital presence have provided businesses an opportunity to aggregate. This can be lucidly explained in the social media environment. becoming useful to users of digital technology and is relevant from an economy.The engine for sustaining India’s growth agenda Big Data as a source of real time business insights Big Data is now widely applicable. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). . a Swiss entity. Industry leaders are showing keen interest in harnessing the potential of big data to enhance value creation by offering specially designed products for their customers. manipulate. call data records. transaction records. Today an online search on Big Data throws up a result of more than two billion pages – which clearly indicates that big data itself unwittingly. digital pictures and videos. This data come from posts to social media websites. has become part of the big data phenomenon. The combined effects of Moore’s law. where data is created by the consumer which provides insights on the needs of the consumers and thus allows businesses to offer targeted services for the consumers. analyse and interpret ‘The Big Data’ to provide real time business insights. © 2013 KPMG. integrate. global positioning system (GPS) etc. store. sector. and an organisation view point.

devices and nodes being connected by digital networks is further revolutionising the ability to generate. feeding databases estimated at more than 2. and about 15 percent of those people had smart phones. All rights reserved.The engine for sustaining India’s growth agenda | 30 The multitude increase in the number of people. and access data.Indian Banking . were using mobile phones. The following depicts a snapshot of the volume of data that a typical bank can be exposed to.5 petabytes. We believe that the transformational changes that Big Data is bringing about are at an inflection point and are in the process of being unleashed. close to 5 billion people. communicate. a Swiss entity. . SAS whitepaper . whose penetration is growing at more than 20 percent a year. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Source: KPMG in India analysis Hence Big Data analytics will have an important role to play in the performance of this sector.Big Data Meets Big Data Analytics Financial services and Big Data The financial services industry is highly data intensive. or 60 percent of the world’s population. Wal-Mart handles more than 1m customer transactions every hour. The industry drivers that accelerate the need for big data in financial services industry are: CUSTOmEr INSIGHT REGULATOrY COmPLIANCE RISK mANAGEmENT © 2013 KPMG. In 2012. share.

All rights reserved. a fully customer-centric view may not be attained. Only 1 in 6 villages in India have access to banking services. Traditionally financial institutions have struggled to provide banking services since they lacked quality data in authenticating this segment as bonafide customers. a savings account with a bank that offers high interest. However with the ‘Aadhar’ initiative. all of which are in textual format. and unstructured data flowing from within and outside the bank. These customers have transient relationships with multiple banks . This problem is compounded by the fact that social networks now capture very valuable psychographic information – the consumer’s interests.a current account at one bank that charges no fees. This shall augment the traditional data warehousing and analytics approach. Banks no longer have a complete view of their customer’s preferences. This will lead to even more unstructured data flows from a wide variety of sources that banks will have to manage. RBI Vision Documents on Payment Systems for 2012 – 2015 Some institutions have already taken the lead in understanding the needs of this segment and coming up with tailor made solutions. a vast proportion of the population in India is excluded from formal banking services. a mortgage with a one offering the best rate.31 | Indian Banking . this is likely to change as there will be a single database capturing the attributes of every citizen in the country. Banks must therefore bring in external sources of information. The regulator has issued guidelines advising banks on accepting ‘Aadhar’ as an identity for opening of bank accounts. Remittance solutions. This is a clear example of how big data can be leveraged in designing customized products and solutions. activities and opinions. information that is often unstructured. Big data technologies therefore play a pivotal role in enabling customer centricity in this new reality. customer emails and claims data and other documents. Banking for the unbanked On the other hand. Even if banks manage to integrate information from their own disparate systems. a Swiss entity. Only then. The Government as well as the Reserve Bank of India (RBI) has placed a significant thrust in driving financial inclusion across the country. Valuable customer insight may also be culled out from customer call records. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). .The engine for sustaining India’s growth agenda Understanding the customer Banking for the affluent There exists a set of customers who have access to a variety of financial products across institutions. banks can address customer satisfaction and build more extensive and competent models. © 2013 KPMG. With a large population of consumers adopting smartphones today. no frills banking account and microinsurance products are in various stages of rollout for this segment. New data integration and business intelligence technologies are needed to gather transactional data residing in CRM systems and payments systems. It will not only bring in more operational efficiencies in financial decision making processes but will also see more and more consumer tools and applications that will leverage the same Big Data technology to alter how consumers manage their finances. and a brokerage account at a discount brokerage. It is imperative to obtain a full understanding of customer’s preferences and interests. which in itself is a huge task. buying patterns and behaviors. we see a growth in the use of mobile applications that allow us to carry out transactions related to managing personal finances.

limits and other risk controls. banks are considering analyzing entire transaction history data sets. we can also expect to see a surge in the number of transactions they make. but increasingly.Indian Banking . From the front office all the way to the boardroom. are now warming up to the new big data reality. Banks that cannot utilize complete information (probably due to storage challenges) and firms that believed reporting didn’t really require management attention.right from data extraction from source systems till the actual submission of returns (reports) on to RBI’s Central Data Repository. everyone is keen on getting holistic views of exposures and positions and of risk-adjusted performance. have to be stored and analyzed along with core operations data. Dealing with increasing fraud and risk The most obvious driver for Big Data adoption is that financial transaction volumes are growing multifold which is resulting in explosive data growth in banks. a Swiss entity. Additionally. © 2013 KPMG. In order to limit fraud and to detect security breaches. Efficient allocation of capital is now seen as a major competitive advantage. in order to accommodate better predictive modelling. the RBI has directed all banks to standardize their regulatory reporting by following an automated data flow (ADF) approach to ensure 100 percent accuracy and zero human intervention in every stage of reporting . the number of data points used by banks for loan portfolio evaluation is also increasing. Many firms are also moving to a real-time monitoring of counterparty exposure. fraud analysis was usually performed over a small sample of transactions. All rights reserved. A number of public sector banks in India have came together to construct a collaborative fraud detection program through the usage of sophisticated analytics techniques. lines of business and firms in order to better predict and manage systemic interplays. Considering the sudden surge in the number of devices that customers can use to initiate core transactions. the data points stored for each transaction are also expanding. In the recent past. For instance. and risk-adjusted performance calculations require new points of integration between risk and finance subject areas.The engine for sustaining India’s growth agenda | 32 Being on the right side of the regulator The Financial sector is a highly regulated sector in India with norms and guidelines set for every transaction and every process. which put enormous pressure on the underlying IT architecture. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). This initiative aims to scan transactions real time to identify patterns which can help prevent fraud. Similarly on the capital markets side. Similary. are required with increasing frequency and complexity. data logs from bank’s internet channels. The Basel regulations around risk management alone have added a significant number of theorems around liquidity planning and overall asset and liability management functions. regulatory efforts are focussed on getting a more accurate view of risk exposures across asset classes. geospatial data from smart phone applications. Not only is the transaction volume increasing. . and a more near real time view is being required. complex stress tests. Pointin-time liquidity positions currently provided by static analysis of relevant financial ratios are no longer sufficient.

deep domain expertise supported by a robust technology framework and skilled resources is vital to harvest the opportunities presented by Big Data (represented in the framework below). efficient operations and customer satisfaction. The technology layer is required to create meaningful blocks of logical data and information. A combination of reliable data elements. a Swiss entity. languages and social profiles presents an interesting opportunity for businesses. Big data combined with power of analytics can go a long way in providing a close substitute for this ‘magic button’. CEOs. while advanced analytics solutions assist in the creation of actionable business insights.The engine for sustaining India’s growth agenda Critical success factors Big Data in isolation can scarcely yield any benefits. A nation with multitude of customer needs corresponding to different economic strata. . The Economist ‘Data. advanced analytics. Some organizations have made attempts with varying degrees of success in trying to harness this. All rights reserved. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). a part of Microsoft’s search engine Bing. can advise customers whether to buy an airline ticket now or wait for the price to come down by examining 225 billion flight and price records.25 Feb 2010 At the press of a button-a near reality Big data assumes special significance for a country like India. © 2013 KPMG. data everywhere‘. irrespective of line of business are in constant exploration of the ‘magic button’ that will at a simple push. enable them with information in making the right decisions for capital deployment.33 | Indian Banking . revenue up-liftment. Source: KPMG in India analysis Farecast.

All rights reserved. . an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).Indian Banking .The engine for sustaining India’s growth agenda | 34 © 2013 KPMG. a Swiss entity.

As the global economy tries to stand on its feet – financial authorities and regulators agreed on new norms for banks’ capital adequacy standards (Basel III). long term debts etc. Capital requirements are rules that force a bank to maintain minimum ratio (based on regulatory guidelines) of capital (such as the bank’s equity. but retains its basic features. The simplified Basel II approach is more ‘granular’ than Basel I. an approach based on external ratings. But the prospects for economic recovery. driven by their own internal rating models. by keeping 8 percent capital to riskweighted assets (RWA). a Swiss entity. All rights reserved. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). market and operational risks. The Basel II is in different stages of implementation among the leading economies of the world. The purpose is to ensure that banks can sustain unexpected losses of the assets they hold while still honouring withdrawals and other essential obligations.) to assets (such as the loans and investments it holds). © 2013 KPMG. Banks were to choose between: first. when the financial crisis affected the global economy. depend on a steady flow of credit and lending. and second an internal ratingsbased (IRB) approach for sophisticated banks. capital was regulated with a simple structure known as ‘Basel I’. The Basel II covers minimum risk capital covering credit. both in India and in the rest of world. Evaluation of capital requirements From 1992.The engine for sustaining India’s growth agenda Public sector banks – Challenged for growth capital Capital is one of the most significant components of the banking system.35 | Indian Banking . A ‘revised framework’ known as Basel II was released in June 2004. The stability of the financial system depends on effective and adequate capital availability and the 2008 crisis did reveal serious problems with the existing requirements. .

875 5. and (iv) liquidity framework. as per the RBI.625 5. comprising common equity tier I capital. 31-Jun-13 31-Mar-14 Basel III also requires banks to carry out credit valuation adjustment (CVA) capital charge to protect themselves against the potential mark to market losses associated with deterioration in the creditworthiness of the counterparty.5 6 3 9 Na 5 6. during the parallel run period) that will serve as a backstop to the risk-based measures described above. In India. 31-Mar-15 31-Mar-16 31-Mar-17 31-Mar-18 (% of RWAs) Common equity Tier I Tier II Min capital ratio Capital conservation buffer Source: RBI 4. retail deposits and wholesale funding with a maturity longer than one year) to match their medium and long term lending needs.5 percent and total capital requirement of 9 percent.5 7 2 9 2. a) The Liquidity Coverage Ratio would require banks to hold sufficient highquality liquid assets (including cash.The engine for sustaining India’s growth agenda | 36 Basel III-the new norms In India. Basel III has also introduced two new liquidity standards to improve the resilience of banks to liquidity shocks.5 percent in India. (ii) enhancing risk coverage of capital. The key elements of Basel III norms are (i) definition of capital.5 7 2 9 1. if the deals are done in over the counter (OTC) market. .5 © 2013 KPMG.5 percent is common equity. As per the Reserve Bank of India (RBI) guidelines for Basel III.Indian Banking . (iii) leverage ratio. over and above the minimum common equity requirement of 5. b) The Net Stable Funding Ratio is intended to ensure banks hold sufficient stable funding (capital and long-term debt instruments.5 9 Na 5.5 percent of RWAs.5 percent of RWAs). These capital requirements are supplemented by a non-risk-based leverage ratio (a minimum Tier 1 leverage ratio of 4. of which 5. implementation of Basel III started from 1 April 2013 and will be completed in a phased manner by 31 March 2018. minimum tier 1 capital ratio has been fixed at 7 percent of risk weighted assets (RWAs). This can be drawn down as losses are incurred during periods of stress. RBI has not published the requirements on countercyclical capital buffer (0-2.5 7 2 9 0.25 5. all non-common tier I and tier II instruments issued by banks will have a provision that requires such instruments. government bonds and other liquid securities) to meet a severe cash outflow for at least 30 days.5 2. a Swiss entity. which is aimed at ensuring that banking sector capital requirements take account of the macro-financial environment in which banks operate. All rights reserved. Basel III also prescribes a capital conservation buffer (CCB) of 2. to be either written off or converted into common equity upon the bank which has solvency issues. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).5 7 2 9 1. One of the key features of Basel III.

However. a Swiss entity. One of the other challenges in terms of non-equity capital is that the Indian market has not developed an appetite for Basel III bonds. which will be dictated by the availability of capital. Since 27 percent money is already blocked in statutory requirements.37 | Indian Banking . All rights reserved. it is interesting to be seen how RBI allows these liquid assets to be part of the Basel III liquidity estimations. and given government’s high deficit financing through market borrowings. © 2013 KPMG. Fortunately. For banks with subsidiaries/Joint ventures (JVs). as the CCB creeps in from 2015 and if loan growth outpaces the internal capital generation. aggregate investments in subsidiaries exceeding 10 percent of the bank’s equity capital would be deducted from core-equity. while investments up to 10 percent of the equity capital would be risk-weighted at 250 percent. Basel III norms on capital requirements may not affect Indian banks as most of the Indian banks are operating at 6-8 percent of common equity. most of the Indian banks’ holdings in their JVs and subsidiaries are less than 10 percent of Tier I capital. as mentioned above. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). The banks may find it difficult to price these bonds and find buyers for the same. The final calibration of liquidity ratios and leverage ratio will be made after further quantitative impact study and observation. banks may face challenges in terms of adequate capital for growth. . which requires a loss absorbing capacity. Indian banks are already complying with RBI regulations on liquidity in terms of Statutory Liquidity Ratio (23 percent of Net Demand and Time Liabilities) and Cash Reserve Ratio (4 percent of NDTL).The engine for sustaining India’s growth agenda Implications of Basel III on Indian banks To begin with. which acts as liquidity buffer in times of distress. The banks may need to review their business strategy.

Thus. The banks will most probably pass on the same to customers. the increase in equity capital requirement is likely to increase the weighted average cost of capital. But based on past experience. The buyer of OTC derivatives will find costlier as the credit valuation adjustment (CVA) charges will be applicable for such derivative transactions from 1 January 2014. allowing banks to expand credit on an inadequate base of capital delivers short-term credit growth at the expense of medium-term credit collapse and economic disaster. sectors like retail will be attractive as these require less capital. They have to look at a longer horizon. The government. will have to pump in around INR 415.75 trillion. Can capital requirements be improved without undermining economic growth? Assuming that banks may be able to raise the increased capital requirement under Basel III from the share holders and markets. It is time to recognise that longer horizon of stability comprising of prudent regulations and market disciplines are better propositions to keep the banks in check while also enabling economic growth. 1 KPMG in India analysis for a committee on ‘Funding of Capital Requirements of PSU banks by Government of India’ © 2013 KPMG. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). which owns 70 percent of the banking system. as we have learned all too painfully. In general.955 crs till FY211 to retain its shareholding in the public sector banks at the current level to meet the norms. However. a Swiss entity. banks need appropriate infrastructure (Human resource (HR). Of the total INR 5 trillion. . alone. credit growth could be a little lower than in the last few years. All rights reserved.The engine for sustaining India’s growth agenda | 38 Additional capital requirements RBI has estimated that Indian banks will require an additional capital of INR 5 trillion to meet the new global banking norms. the equilibrium lending rates are likely to be marginally higher and as a consequence.Indian Banking . where the financial system globally had fallout. where a stable financial system will ensure a better and less volatile return. questions have been raised as to its impact on economic growth and profitability of banks. equity capital will be around INR1. technology and analytics) to manage large pool of retail assets. Banks would partly pass on the increasing cost of capital to the borrowers as higher lending rates.6-1. With the new capital norms coming into effect. The implementation of new norms will affect the investor returns.

Companies that can address this gap can dramatically improve their chances of long-term success as skills deficiencies amongst middle managers can be a significant and hidden drag on organisational performance. deployment of integrated technology platforms. new risk paradigms. and above all.The engine for sustaining India’s growth agenda Addressing the leadership vacuum in the PSBs Indian banking continues to transform at a rapid pace. rewards and succession planning. thereby creating a leadership vacuum in the middle. Within this scenario. increasing regulatory complexity and globalisation. Issues such as talent acquisition. 1 http://www. a Swiss entity.business-standard. career planning. The entry of private banks with high efficiency operating models. the Indian public sector banking group is currently set to face a major talent pipeline challengewith over 80 percent of senior management personnel in the industry due to retire in the coming 5 years1. the emergence of highly demanding customer segments have all contributed to this transformation. With the banking industry facing several challenges in terms of sector growth. The focus of leading banks has strategically shifted from being generic services providers to becoming aggressive sellers of financial products and providers of differentiated service levels. are quickly becoming the key strategic challenges for most bank boards. . learning and development. This shift is forcing banks to relook at all aspects of their talent management strategies.39 | Indian Banking . there is a shortage of skilled managers to replace the middle management personnel who will be moving into these senior management roles.com/india/news/rbi-for overhaulbanks-hr-practices/476424/ © 2013 KPMG. All rights reserved. this middle manager gap acts as a barrier to the effective execution of business strategy. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). compensation. better on- boarding.

Due to a decade long hiring freeze in the 1990s and high resistance to hiring talent laterally. it is difficult to motivate and engage entry level employees given that attrition amongst entry level staff is very high amongst private sector banks. lack absence of strong middle management staff. 2 http://www. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).000 employees at the entry level in the coming year3. • Loss of institutional knowledge – Given the hierarchical nature of decision making in the banking sector.ece 3 http://www.In the absence of a strong succession plan and talent pipeline.thehindubusinessline. the industry has been hiring aggressively at the entry level in order to sustain sector growth. With the shift in focus towards customer facing and sales roles.Over 1.com/?p=3619 © 2013 KPMG.Indian Banking . Given the large generation gap between the senior management level and entry level talent. many PSBs do not have a strong enough talent pipeline to replace the personnel who will be moving out of these roles. A concerted leadership development and re-skilling exercise would be required to develop their capabilities. • Gaps in critical roles. the current junior management talent lacks the skills and capabilities required to handle the growing regulatory and technical complexities of the banking sector.com/industry and-economy/banking/retirements-will-create-18 lakh-vacancies-in-public-sector-banks/ article3855137 .timesjobs. who are currently in senior and middle management roles in PSBs. This has led to a growing generation gap as there is not enough middle management talent to direct and lead the growing pool of entry level team members.com/industry and-economy/banking/public-sector-banks-will recruit-bigtime-this-year-too/article2065923.The engine for sustaining India’s growth agenda | 40 Understanding the leadership vacuum Public sector banks (PSBs) are set to face a ‘retirement decade’ soon.PSBs are set to hire as many as 56.thehindubusinessline. The middle management talent gap might have several adverse effects including: • Difficulty in driving business of middle managers who can communicate strategy and drive execution efforts can have an adverse effect on productivity and motivation levels.ece 4 http://content.In the strategy due to the lack of a middle management layer to ‘translate’ the strategy designed by the top management into workable action plans.8 lakh personnel from the baby boomer generation. more and more critical middle management roles in Public Sector Banks are lying vacant leading to a slowdown in decision making4. • Motivation challenges. are due to retire in the coming 5-10 years2. . and that a large number of employees leave within 1 year of joining in both PSBs and private sector banks. a Swiss entity. All rights reserved.

41 | Indian Banking . . All rights reserved.The engine for sustaining India’s growth agenda A two level approach can be adopted for addressing the leadership challenges Banks need to adopt a two-pronged solution to address the leadership vacuum. Level 1 approach can include hiring talent laterally. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). hiring retired executives and freelancers to fill critical roles and assessment and development of junior management talent. Prioritising risk areas for developing Level 1 and Level 2 approaches Source: KPMG in India analysis For representational purpose only © 2013 KPMG. Banks also need to look at talent management holistically and define a long term Level 2 approach as wellthey need to develop a talent strategy by taking a systems approach to recruitment and talent management and rethinking their employer value proposition. they need to develop an immediate Level 1 approach to address talent management issues in the short term. a Swiss entity. A course correction plan needs to be developed to address highly critical and immediate issues such as hiring of talent to replace attrition and the effects of the ‘retirement decade’ as well as re-skilling of talent to take on middle management roles.firstly.

they will need to approach manpower planning from a skill requirement and capability perspective. The successor pipeline may be very limited or may not exist for certain roles with specialised skill sets. This will help in smooth transfer of skill sets and will help possible successors understand the complexities of their future roles. Assessing current talent on these skills/ competencies will help them identify not only current skill gaps but potential future risk areas in terms of skills and capabilities.both in terms of technical and leadership skills. . Creating customised succession plans for critical middle management roles will become crucial for sustaining growth. Banks will need to create an organisational skills inventory and a competency framework to identify skills and competencies required to match business needs.com/Money/ BBPrvun2NGwrzghHOAPqyL/Public-sector-banks-take a-look-at-human-resources-challenge. these solutions can be incorporated into the larger talent management plan at a later stage.6 In order to maximise returns on the investment made in training and talent development.livemint. not only in terms of manpower numbers but also in terms of skills and capabilities. 5 http://content.timesjobs. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). However. A few possible Level 1 approach that will play a critical role in the coming years include: Manpower planning will become more competency-based and skill oriented in order to address impending skill gaps. Targeted and customised individual development plans will need to be designed for each of the candidates so as to address their individual developmental needs. Given the low faculty to employee ratio. a Swiss entity. These developmental plans need to also take into account succession timelines. Banks will also need to focus more on e-learning and continuous learning to address knowledge dissemination and geographical reach issues. Tie-ups with leading national and international management schools and technical institutes in order to create customised courses will also develop the talent pool. especially in terms of skill sets such as sales.The engine for sustaining India’s growth agenda | 42 Developing a Level 1 approach: Key trends Level 1 approach addresses immediate risk areas in terms of manpower and organisational capabilities. critical leadership roles which pose a succession risk can be identified.html © 2013 KPMG. Creating a skills heatmap will help the bank’s HR leadership pinpoint critical areas and accordingly create focused training and leadership development interventions. banks will also need to rope in more external faculty to provide better exposure. especially in the case of public sector banks. Talent development and training initiatives will become more business need-based in order to maximise returns on training Training and talent development interventions in most banks currently is an ad hoc exercise.5 This exercise will act as a solid base for creating a comprehensive long term recruitment strategy which will help banks in hiring at a steady pace and thereby. They need to consider this as an opportunity to optimise their manpower deployment model so as to make maximum use of existing skills and capabilities. To do this. Another critical step which will be crucial for developing middle management talent is the introduction of a strong coaching and mentoring system with each incumbent being assigned as the mentor for his/her identified successor pool. possible successors need to be assessed based on the organizational skill inventory/ competency framework to determine their readiness to take on the role. alternative solutions such as lateral recruitment.Indian Banking . developing a better employer value proposition. In such cases. All rights reserved. While conducting this exercise. Banks will need to internally identify the magnitude of the shortfall. This is especially true for specialised skill sets such as rural banking and international banking. Based on the manpower assessment exercise. relationship management where the attrition rate is fairly high. However. especially amongst public sector banks. The key steps in this process would be to assess the criticality level of the position and accordingly create a succession profile for each role by identifying feeder roles to form a potential pool of successors. Once this is done. hiring of freelancers/ independent financial advisors/ retired executives and extension of the tenure of current incumbents can be considered. The first step in addressing a problem is to understand it. these must be treated as stop-gap measures and long term successors will still need to be identified and developed. banks will also need to account for change in skill requirements and reduction in manpower requirement in the future as banking becomes more technology intensive and global. banks will need to create customised training solutions that are tailored to business needs based on the organizational skill inventory.com/?p=3712 6 http://www. Ad hoc recruitment in the past two decades is one of the main reasons for the current lack of talent at the middle management level. Banks will then need to focus on identifying and developing successors for these critical roles.

• Lateral/ Global recruitment: Given the large talent gap that they face in terms of middle management. to replace the loss of certain specialised skill sets. Banks can also consider alternative solutions which do not require them to draw from their traditional talent pools. © 2013 KPMG.The engine for sustaining India’s growth agenda More and more banks will focus on creating specialist career paths for entry level talent. Many Indian IT companies have successfully adopted this approach of hiring global sales heads in different geographies. Globally as banking becomes more technically compartmentalised. middle management personnel tend to be more generalists rather than specialists. Initiatives such as tying up with academic institutions for higher education or for providing specialised banking certifications or international stints for providing global exposure can also help ensure development of specialist skills and capabilities. etc. Some possible options may include: • Outsourcing of non-core activities: While a number of large private sector banks have already created subsidiaries to outsource non-core activities in order to control costs and be able to tap into a larger talent pool. Career stage profiles for individual candidates need to be developed and coaches and mentors need to have regular discussions with employees to ensure their career aspirations are being met. • Hiring from alternative talent pools: Banks can also look at the option of tapping into alternative talent pools such as freelancers and independent financial advisors as well as talent from related industries such as insurance. a more structured process is required. The dual career model is a good option in this regard – it provides employees visibility regarding both generalist and specialist career paths and helps them make a choice between the two. To make career pathing more actionable. This strategy has an added advantage of requiring less middle management supervision from the bank’s side. a Swiss entity. Private sector banks could look at the option of hiring global talent to meet lateral hiring requirements as well as addressing the needs of their international branches. In PSBs. especially in the managerial cadre and encourage them to specialise. Public Sector Banks and smaller private sector banks have yet to adopt this strategy due to trade union pressures. investment banking. A key step in addressing the shortage of specialised skills is to define career paths for middle management talent.43 | Indian Banking . banks need to define career options for entry level personnel. It also helps in identifying and maintaining a sizeable talent pool for specialist skills. Banks will need to identify and tap into non-traditional talent pools in order to replace niche skills. All rights reserved. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). microfinance. this may prove detrimental in developing specialist skills and capabilities. . To address this. Public Sector Banks may need to look at the option of hiring laterally in larger numbers.

the leadership vacuum is likely to snowball into one of the major challenges in the banking industry in the near future. In conclusion. a Swiss entity. if corrective measures are not undertaken soon. develop and strengthen. .The engine for sustaining India’s growth agenda | 44 Developing a Level 2 approach To define a long term talent management strategy. plan will have to be devised at each step of the talent cycle using either one or more of four key strategic design elements.Indian Banking . banks will need to look at their talent management model and critically reassess and redefine it.restore. In our opinion. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). All rights reserved. grow. banks whose current leadership has the vision and foresight to address this issue now are sure to reap the benefits in the future. Developing a long-term talent management strategy Source: KPMG in India analysis Each area of talent management will need to be addressed using either one or more of these key strategic design elements in order to formulate a comprehensive talent management strategy. However. © 2013 KPMG.

the apex body of business and industry in India. ICC’s forte is its ability to anticipate the needs of the future. All rights reserved. Mr Ashok Jain.net W: www. Mr. Indian Chamber of Commerce Head Office Dr. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). such as Mr B M Birla. Mr S P Jain. Patna and Bhubaneshwar functioning efficiently. provides necessary Policy Inputs & Budget Recommendations to Governments at State & Central levels. over the last few years has truly emerged as a national Chamber of repute. and prepare the stakeholders in the economy to benefit from these changes and opportunities. ICC has a special focus upon India’s trade & commerce relations with South & South-East Asian nations. and building meaningful synergies among Industry and Government by addressing strategic issues of national significance. Rajiv Mundhra is leading the Chamber as its President. and one of the most pro-active and forward-looking Chambers in the country today. Mr Russi Mody. ICC’s North-East Initiative has gained a new momentum and dynamism over the last few years. have led the ICC as its President. and large Investment Summits. Currently.indianchamber. a Swiss entity. Bangladesh. Rajeev Singh Director General-ICC 4 India Exchange Place Kolkata 700 001 T: +91 33 2230 3242 F: +91 33 2231 3380/ 3377 E: ceo@indianchamber. and has played a key role in building synergies between India and her Asian neighbours like Singapore. Its membership spans some of the most prominent and major industrial groups in India. Indian Chamber of Commerce (ICC) is the leading and only National Chamber of Commerce operating from Kolkata. as the first organised voice of indigenous Indian Industry. Guwahati.45 | Indian Banking . in sync with India’s ‘Look East’ Policy.it regularly undertakes Macro-economic Surveys/Studies. Set up by a group of pioneering industrialists led by Mr G D Birla. and Bhutan through Trade & Business Delegation Exchanges. Thailand and Vietnam have created new vistas of economic co-operation between the North-East of India and South-East Asia. ICC is the founder member of FICCI. Canada. Sir Badridas Goenka. prepares State Investment Climate Reports and Sector Reports. the Indian Chamber of Commerce was closely associated with the Indian Freedom Movement.net © 2013 KPMG. respond to challenges. Several of the distinguished industry leaders in India. Lala Karam Chand Thapar.The engine for sustaining India’s growth agenda About Indian Chamber of Commerce Founded in 1925. with full-fledged offices in New Delhi. The Indian Chamber of Commerce headquartered in Kolkata. ICC also has a very strong focus upon Economic Research & Policy issues . Mr.Sanjiv Goenka. Sir Ardeshir Dalal. and the Chamber has been hugely successful in spreading awareness about the great economic potential of the North-East at national and international levels. Trade & Investment shows on North-East in countries like Singapore. ICC is the only Chamber from India to win the first prize in World Chambers Competition in Quebec. Indonesia. .

KPMG firms provide a wide range of Risk Consulting. is the Indian member firm of KPMG International and was established in September 1993. KPMG Advisory professionals provide advice and assistance to enable companies.500 international and national clients. Pune. in India.Indian Banking . whether we are dealing with the tax aspects of a cross-border acquisition or developing and helping to implement a global transfer pricing strategy. Tax and Advisory services. performance-based. Kochi.000 people working in member firms around the world. The Indian firm has access to more than 7 . Hyderabad and Kolkata. © 2013 KPMG. KPMG has offices across India in Delhi. intermediaries and public sector bodies to mitigate risk. Management Consulting and Transactions & Restructuring services that can help clients respond to immediate needs as well as put in place the strategies for the longer term. Ahmedabad. We operate in 156 countries and have 152. KPMG is a global network of professional firms providing Audit. KPMG’s Tax services are designed to reflect the unique needs and objectives of each client. providing detailed knowledge of local laws. Chennai. improve performance. KPMG in India provide services to over 4.The engine for sustaining India’s growth agenda | 46 About KPMG in India KPMG in India. industry-focused and technology-enabled services. We strive to provide rapid. In practical terms that means. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Bangalore. . a Swiss entity. Chandigarh. Mumbai. markets and competition. All rights reserved. which reflect a shared knowledge of global and local industries and our experience of the Indian business environment. Our professionals leverage the global network of firms. while helping to control costs. and create value. a professional services firm. Our Audit practice endeavors to provide robust and risk based audit services that address our firms’ clients’ strategic priorities and business processes. many of whom are internationally trained. KPMG firms’ work with their clients to assist them in achieving effective tax compliance and managing tax risks.000 Indian and expatriate professionals. regulations.

com Neha Punater Director – Management Consulting T: + 91 22 3090 2158 E: nehapunater@kpmg.@KPMGIndia kpmg. Rajeev Singh Director General Indian Chamber of Commerce 4. Although we endeavour to provide accurate and timely information. logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.2231 3380/3377 E: ceo@indianchamber.net sg@indianchamber. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).com ICC Contacts Dr. . Printed in India.com Ambarish Dasgupta Head – Management Consulting T: + 91 33 4403 4095 E: ambarish@kpmg. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.com/in The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.com Akeel Master Head – Financial Services T: + 91 22 3090 2486 E: amaster@kpmg.net indianchamber. Kolkata-700001 T: +91 (33)-22303242-44 F: +91 (33). a Swiss entity. All rights reserved.net Follow us on: Twitter .com Shashwat Sharma Partner – Management Consulting T: + 91 22 3090 2547 E: shashwats@kpmg. The KPMG name. India Exchange Place. © 2013 KPMG.KPMG Contacts Pradeep Udhas Head – Markets T: +91 22 3090 2040 4100 E: pudhas@kpmg.

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