Analysis of the banking Sector

A Services Marketing Assignment

Abhijith Shetty Amit Nayak Anubhav Nanda Gaurav Midha Sachin Thomas

02A 04A 07A 16A 42A

Indian Banking
India has a large population with almost 65 percent of the population residing in rural and semi urban areas. It is a land of diverse cultures and unique socio economic and geographic characteristics. The Indian economy is heavily biased towards the public sector with an economic policy that combines both socialistic and capitalistic features. All these features determine the size, structure, diversity and nature of the banking sector in India. The Indian banking system comprises the following institutions: Commercial banks -public sector -private sector -foreign banks -cooperative institutions a. urban cooperative banks b. state cooperative banks c. central cooperative banks Market Size

Total assets of US$ 335 billion Total deposits of US$ 279 billion Over 290 scheduled banks Public sector: 27 Private sector: new – 9; old – 24 Foreign: 37 Over 190 regional rural banks Over 66,000 branches Public sector: 46,000 Private sector: 5,500 Foreign: 190 Regional rural: 14,400

LIST OF BANKS IN INDIA Public Sector Banks: 1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Bank of Maharashtra 6. Canara Bank 7. Central Bank of India 8. Corporation Bank 9. Dena Bank 10. Indian Bank 11. Indian Overseas Bank 12. Oriental Bank of Commerce 13. Punjab and Sind Bank 14. Punjab National Bank 15. Syndicate Bank

16. UCO Bank 17. Union Bank of India 18. United Bank of India 19. Vijaya Bank Private Sector Banks 1. Bank of Rajasthan Ltd. 2. Catholic Syrian Bank Ltd. 3. City Union Bank Ltd. 4. Dhanalakshmi Bank Ltd. 5 Federal Bank Ltd 6. ING Vysya Bank Ltd. 7. Jammu and Kashmir Bank Ltd. 8 Karnataka Bank Ltd. 9. Karur Vysya Bank Ltd. 10. Lakshmi Vilas Bank Ltd. 11. Bank of Punjab Ltd. (since merged with Centurion Bank) 12. Centurion Bank of Punjab (since merged with HDFC Bank) 13. Development Credit Bank Ltd. Main Competitors for Banking • • • • • • Post offices. Mutual fund Share market Insurance. Money lenders Family and friends

14. HDFC Bank Ltd. 15. ICICI Bank Ltd. 16. IndusInd Bank Ltd. 17. Kotak Mahindra Bank Ltd. 18. Axis Bank (earlier UTI Bank) 19. Yes Bank Ltd. 20. IDBI Bank Ltd. Foreign Banks in India ABN-AMRO Bank N.V. Abu Dhabi Commercial Bank Ltd. American Express Bank Ltd. Barclays Bank PLC BNP Paribas Citibank N.A. DBS Bank Ltd Deutsche Bank AG HSBC Ltd. Standard Chartered Bank State Bank of Mauritius Ltd.

SERVICES OFFERINGS Courtesy the advances in technology, the bank customer now has access to ATMs, mobile banking, any branch banking, Electronic Fund Transfer(EFT), etc; treasury managers have transparent Negotiated Delivery Systems(NDS); and commercial bankers with the comfort of Real Time Gross Settlement(RTGS). Thus, transaction processing is done at the back office and bank now focuses on building relationships and products with each of the distinct customer categories: Personal Personal category has been the most focussed and hence with the most diverse offerings.

Conventional services include: Deposits: Term (Fixed, Savings), Non-term(Current) Free debit/credit card Free/nominal premium insurance coverage Loans: Housing, Education, Vehicle Lockers and safety vaults Gift cheques

Specialised services include the Vishwa Yatra Foreign Card by the SBI, which clubs together the benefits of international access with those of a debit card; Eshoppe by Bank of Baroda (BoB) and Central Bank of India(CBI) which enables the frequent shopper the ease of shopping safely from the comfort of his house; Gen Next services like Lifestyle, Power, Suvidha, Junior offered by BoB facilitating an improved access to new generation products, consumer goods and saving schemes ; World Gold Council certified gold bars as an alternative form of investment; Retail loans for home improvement, loans against rent receivable, to finance purchase of an IPO, career development etc.; Electronic Clearance Service(ECS) to facilitate speedy and time bound clearance of outstation cheques and fund transfers; mobile payment facilities for the customer on the move; prepaid charge cards for purchases and Forex; Ashray – the reverse mortgage scheme by BoB for the elderly; no frills account having no initial balance or initial payment by HDFC.

Rural The nationalisation of banks in 1969 and subsequently in 1980, the Narsimham committee reforms and the Tarapore committee recommendations all led to heightened emphasis on rural banking. To focus on the villages, the Service Area Approach (SAA) and the Villager Adoption Scheme were earlier efforts in this direction. Regional Rural Banks (RRBs) in India account for a lion’s share of the banking services provided in the rural sector with lending rates being 1% less than the market rate and deposits enjoying 1% greater interests. Specialised service offerings include locker deposits with lockers supplied by the banks; Priority Sector lending for agriculture, retail, self-help groups, small businesses and government activities; Kisan No-frills account by HDFC; Money Lender Free Village project by South Indian bank; Agriculture Advisory Services by SBI. The Cent Sahyog Scheme was launched as a financial literacy and credit counselling centre by the Central Bank of India to provide awareness on banking products and counselling to distressed farmers irrespective of which bank they had borrowed from.

Corporate and Business (B2B) To cater to the fast growing corporate clientele, specialised service packages are being offered. Wholesale banking provides facilities of syndication and internalisation of loans; loans to meet working capital requirements; Line of Credit; Export Finance; MBOR loan; Sub PLR loan; FCNR loan; Bridge loan; Advance against shares; Project loans; SME loans for the business enterprises; Clear Traders’ loan; Takeover of Accounts are normal services which are indispensable for the corporate sector. Merchant banking services provided to corporates during equity issue including underwriting, issue management, collection and dispensing, letter of guarantee; foreign capital arrangement etc. are essential to any corporate. International (NRIs) For NRIs, remittances from abroad can be channelized through a number of banks in collaboration with Western Union Money Transfer like SBI and BoB. Specialised facilities to returning Indians is a focus of BoB wherein it makes arrangements for transferring savings and investments from abroad to India and advising them on taxes and other compulsory border charges. FGN Currency credits are provided; FCNR (B) loans; off shore banking; Correspondent banking; Exim banking etc. are other services Other Services This includes services beneficial to all categories like bill payment, internet banking, money transfer, Demat account etc. Treasury services are provided by banks both in domestic and foreign currencies for Commercial Papers (CP), Certificates of Deposits (CDs), Government Securities, Bonds and Certificates, Debentures, Equities etc. National Securities Depository Limited (NSDL) works in collaboration with the banks to provide soft depository maintenance of equities and shares, also enabling transferring and easy sale via the electronic medium. Wealth management services are provided to help clients maintain the financial portfolios like mutual funds, gold funds, off shore funds, energy funds, future markets etc. Cash management services are also provided to help compound present investments. Letters of credit are provided to help enable foreign trade on credit and letters of credit worthiness may also be issued. Free tax consultation and tax filing services are also provided to all clients as and when required. SMS alerts (pull or push) in the OTS format as well as toll free service numbers are provided to keep the interface active during non-banking hours. Internet banking helps create a 24 hour banking experience for all kinds of customers, thus, making banking truly accessible and available. 24 hour bank branches also cater to this requirement.

SERVICE QUALITY Indian banks have traditionally been seen as staid, bureaucratic organizations where there is lot of red tape to go through for even the simplest tasks. A big grouse of customers (increasingly, the young) is that banks have no human ‘face’ to them. Since the economic reforms of the early 90’s, Indian banks have come under increasing pressure from other industrial sectors to match up with their levels of customer service. When sectors as diverse as healthcare, transport, entertainment etc. all placed a high premium on satisfying customers through impeccable service, banks could not wait and watch. It is well established that today, customer loyalty is of prime importance and can’t be ignored. A dissatisfied customer can well take his business elsewhere, and this is becoming increasingly true today because we have so many new private (and foreign) entrants to the category. Plus, when today’s customers are busy and short of time, they expect to be treated well. Since the nationalization of banks in 1969, banking has primarily been a domain of the central government. In 1991 after the liberalization policies the private sector banks were allowed to be set up. These private sector banks have been very successful in capturing the market share which is primarily due to the superior quality of services that these banks have been able to provide. The question now arises as to what is quality? Quality can be defined as the ability to meet the customers’ requirements and needs to the fullest on an ongoing basis. Service quality is the most important factor in the banking sector because the duplication of services and products is very easy and differentiation between products is very difficult and hazy. So the quality of service becomes the only differentiator and is the key to continuous success. In today’s times with the increased competition the banks that want to survive will have to provide quality service. SBI realized that if it had to compete with the private banks it had to improve and it did so and now it is one of the best banks in the country. Research studies have even proved that customers are willing to pay for better quality service. ‘Customers’ for a bank are heterogeneous. They come from varying cultural and socio economic backgrounds so the perception of the quality of banking services will vary from customer to customer and even for the same customer at different points of time. For e.g. a person who goes to an ATM to withdraw cash specially on a Sunday finds it temporarily out of order is more likely to be dissatisfied than he would be if he just happened to pop into an ATM on his way to work.

Capacity Constraints in Banks The growth of the Indian banking industry has been the primary driver for the development of India. India has 88 scheduled commercial banks, 27 public sector banks and 31 private banks. Even though social obligation weigh heavily on banks, forcing them to expand, this is not possible in an economy that is currently growing at 9%. With the real estate sky rocketing, a tough challenge has been thrown at the banking in terms of physical space. Presence of physical banks is by and large adequate in cities. Cities hence do not provide the ground to expand. Rural expansion poses auxiliary constraints like scare availability of electricity, skilled professionals etc. Economic reforms in India have led to substantial growth in financial institutions. Certain constraints prevent these institutions i.e. banks from expanding at the rate that the reforms provide them. Physical Constraints – Real Estate, Operational Facilities Human Resources Constraints Performance Issues Market Issues – Lack in Depth in the Debt markets, inadequate foreclosure laws, heavy stamp duties etc People Sentiments The current attempt at growing in the online space will soon stagnate taking into consideration the load that an ever penetrating internet channel would infuse on the online application. The speed with which this would expand would, also, be restricted and a direct function of the % increase in internet penetration. A growing economy allows its citizens to take higher financial risk by using several other financial instruments. The positive markets provide positive sentiments converting banks into a secondary fallback option.

Marketing Strategy • Financing rapid industrial growth – With the Indian economy growing at a blistering pace on the back of strong industrial and services growth, the Indian companies are looking to build up capacity to meet future demand. Banks play a pivotal role in financing this industrial growth. Technological innovations & challenges Banks are aggressively adopting the latest technology in order to improve product offerings, customer service, and operational efficiency and risk management systems. Financial inclusion & Rural – Microfinance In the quest for new markets and customer segments, as well as with the RBI directives in this area, banks are looking at the rural and unbanked segments in a new light as a huge business opportunity.

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Convergence to a single solution provider – With pressures on the spreads and the competition in the urban markets increasing rapidly, banks need to develop new ways to sustain profitability. Banks led to a plethora of new products, hence becoming a one stop shop for all financial solutions. Roadmap by RBI for foreign banks The RBI has laid out a two phased roadmap for giving greater freedom to the foreign banks in India. This has spurred the entry of several other foreign banks in India, along with acting as a signal to the domestic players to pull up their socks to face the new competitors. Growth in retail lending The under banked Indian population as well as the high margin on retail products makes this a very attractive market for the banks. The all-inclusive nature of this growth in terms of sectors covers all consumer segments as well as product segments.

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Demand for derivatives & other risk management products – The increasingly dynamic business scenario and financial sophistication also increase the need for customized exotic financial products.

The complex and peculiar nature of risks faced by the companies are passed onto the banks. Innovative financial tools and advanced risk management methods are required by the banks to capitalize on this business opportunity. Consolidation The process of consolidation in India aims at ironing out these deficiencies. The Indian banking industry may soon be characterized by fewer but very competitive banks.

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Capital account convertibility – With the possible introduction of capital account convertibility in India, it will provide additional inflow and outflow of foreign currency. This exposes banks to additional exchange risk apart from providing an additional source of revenue generation. Global expansion plans Most Indian banks including the PSU banks already have branches abroad, albeit with minimal presence in terms of market share. • – – SME Financing SMEs, with the recent growth, are the new goldmine that the banks have hit upon. With a host of services ranging from bill discounting, factoring and even venture capital funding, banks are knocking at their doors, ready to customize offerings to suit their needs and acquire these customers. E.g. ICICI and SBI

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New Orientation among Banks Traditional/Public Sector Sell products Product research: what will sell? Product sales and profitability targets Product specialist groups Introduce new offerings every few years/months “Branch banking” Focus - customer acquisition New/Private Sector Meet customers’ needs Customer research: what does the customer want?

Customer segment sales and profitability targets Customer owners Customer specific new offerings every week/day Customer convenience Deepen relationships

Summary The reform and liberalization process has transformed the Indian economy Structural shift with service sector growth Immense potential to leverage technology and knowledge capital Improved competitiveness in manufacturing after intermediate period of restructuring & rationalization Growing international linkages Exports, manufacturing and distribution overseas India as a manufacturing base Globally benchmarked businesses, capable of competing internationally The banking sector has achieved significant success in addressing legacy concerns Resolution of asset quality concerns through recovery, restructuring and provisioning Focus on technology and customer orientation The economic transformation provides major opportunities for the banking sector Retail finance – credit and banking services Corporate finance - banking services and structured finance The sector is poised to capitalize on these opportunities

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