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YES BANK- Businessworld Transformation Series 2.


YES BANK – Businessworld Transformation Series has been conceived as a 3 part series, designed to provoke
acumen and thoughts of management students with specific business scenarios. It is our endeavor to present to
you the most pertinent opportunities and challenges facing the Indian banking sector, thereby increase
awareness, elicit participation and jointly identify strategies for transformation. The basic ethos of the
Transformation Series is to enthuse the concept of Innovation Driven Growth in young minds.

Last year, in the first edition of the Transformation Series, you had advised “Professionals’ Bank of India Ltd
(PBoI Ltd)” in devising its business strategy to: Build a World Class Human Capital, Build a strong consumer
brand and Identify growth opportunities in allied businesses.

A brief background of PBoI Ltd.

As you are aware, in a relatively short span of 26 quarters, PBoI has emerged as the #1 Mid Sized Bank in the country. In
a relatively commoditized and highly competitive market, PBoI has created a unique differentiated positioning through
Knowledge Banking driven relationship oriented strategy, focusing on the emerging sectors of economy. As full service
commercial bank, PBoI combines the strengths of its Relationship teams, Product experts across Transaction Banking,
Corporate Finance, Financial Markets, Investment Banking and Knowledge Bankers to provide customized financial
solutions to its clients. PBoI has since inception invested in innovative business processes and technology platforms and
has many firsts to its credit. This competitive advantage has enabled the Bank to provide consistent customer service and
TATs, while continuing to grow rapidly.

This year, in the 2nd part of the Transformation Series, we focus on an interesting challenge thrown at the
Banking Sector:

Sustainable Financial Inclusion Based on Market Principle: The issue of financial inclusion is at the center
stage of agenda for the government. Banks will need to develop innovative & profitable means to serve this
segment through low cost business models having low break even ticket size of business.

Sustainable Financial Inclusion Based on Market Principles

“Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit
where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.”
– Report of the Committee on Financial Inclusion, headed by Dr. C Rangarajan, former governor of RBI.

Traditionally, there have been some major challenges in achieving complete financial inclusion in a large
country like India with infrastructure in varied states of development. Further, reasons behind Urban Exclusion
are quite distinct to reasons behind Rural Exclusion and hence the solutions need to be developed accordingly.
• Rural: Only 10% of the villages have a bank branch, and underdeveloped infrastructure in these places
limits access to these branches. The opportunity cost for a rural customer travelling to a branch, is a major
deterrent. Last mile connectivity adds to the cost of banks.
• Urban: Urban financially excluded consumer comprise largely of laborers, self employed and workers in
unorganized sector who is typically a migrant, slum dweller without regular or substantial income, credit
history or identity references. He/she needs to be educated and convinced about the benefits of formal
banking, given that reaching out to banks for small ticket transactions takes away productive, wage earning

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Further. RBI is committed to achieving 100% Financial Inclusion and has initiated a number of measures involving Commercial Banks. lending by banks – both directly and indirectly (and related banking services like saving. for their needs are often sudden and exclusive. micro credit etc. Till recently. the success and rise of MFIs is noteworthy and has resulted in a paradigm shift. operational issues such as high costs associated with low value transactions and a limited rural product suite dampen the uptake of banking services by the rural customer. Exhibit 5: Base Rate of Some leading Private Sector & Foreign Banks).0 percent to 8. At the same time. in January 2010. and population per bank branch is as high as 16.25 percent. 2008).based models to efficiently leverage on the available technology-enabled financial inclusion solutions.4%) out of a total of 89.9 million farmer households (51. language and mistrust & unfamiliarity with financial products. they need to appreciate the business potential in financial inclusion. a number of factors have necessitated strategic rethinking on part of PBoI. including through Banking Correspondents (BCs). The previously non-bankable sections of the society are now perceived as a source of revenue.3 million households do not have access to credit either from institutional or non institutional sources (NSSO. going forward. MFI etc. effective from July 1. Self Help Groups (SHG) or Joint Liability Groups (JLG) of individual farmers. only 27% of total farm households are indebted to formal sources. (Exhibit 1: Earners having Bank Accounts) There is a lot of ground to be covered in terms of comprehensive financial inclusion. lending to the financially excluded segment – including farmers. Innovation lies at the heart of financial inclusion. Given the backdrop of the developments. micro insurance.000 per branch. Recently. advised banks to ensure provision of banking services to the financially excluded and asked banks to submit a plan to provide banking services through a “banking outlet” in every village having a population of over 2000. PBoI has fixed its base rate at 7. Nearly 45. While regulatory requirements do ensure that commercial banks focus on banking the underdeveloped and excluded. (Exhibit 2: Population per Bank Branch) At the same time. the RBI.0%. While Banks have not yet figured out a convincing method of servicing the financially excluded. 2010. Page 2 of 9 .• Common factors: Socio-cultural factors like illiteracy. It remains to be seen how PBoI can effectively use the 25-125 bps differential in base rates – especially with respect to inclusive banking. As banks increasingly realize that the bottom pyramid is bankable and profitable. more so when RBI is increasingly focused on “bank led financial inclusion model”. The base rate for public sector banks is in the range of 7. RBI introduced Base Lending Rate for banks. remittances) to this segment. RBI suggested that such banking services may not necessarily be extended through a brick & mortar branch but can be provided through any of the various forms of Information & Communication Technology (ICT) . qualifies as Priority Sector Lending (PSL) and forms a critical portion of a Bank’s PSL targets. they are keen to develop sustainable business models. while that for private sector and foreign banks is lower by 50-100 basis points (Exhibit 4: Base Rate of Some leading Public Sector Banks. micro and small enterprises. lack of sufficient KYC/credit history/profile act as barriers to access. (Exhibit 3: Purpose of Loans) Evolving Regulatory Environment Importantly. doing away with PLR linked rates to bring more transparency to loan pricing. has been driven by the need to fulfill the ‘mandated’ PSL targets. it will be a strategic priority for banks as the customer segment in question will be the largest in numbers over the next decade and is being targeted by multiple financial institutions like NBFCs. However.

and Retail Banking has been focused largely in the Delhi – Mumbai Industrial Corridor (DMIC) given the concentration of current & planned development in this corridor. PBoI also intends to meet its PSL subcategories targets fully through its FI Plan by FY 12. PBoI now plans to develop and roll out a Financial Inclusion (FI) strategy which will. thus reducing the need for an extensive organizational setup. PBoI has developed some business experience in direct farmer lending/weaker section lending through its uniquely designed pilot programs in select branches. is operating out of three regions which cover 9 zones and 30 branches. Consequently. Through-out its initial formative years. the Inclusive Banking Group also has been mostly based out of these regions in its current pilot phase. Corporate Finance.Wholesale Banking.Leading bankers believe that RBI will continue to monitor and tweak the regulatory environment to ensure that financial inclusion is followed in spirit and not only in letter. (Exhibit 6: PBoI’s Inclusive & Social Banking Group – organization structure) Currently. a lot of banks favor partnerships with Microfinance Institutions and Corporates to indirectly lend to the weaker section and achieve PSL requirements. the Inclusive Banking team. which is critical to direct farmer lending/weaker section lending. P Raman. where local community is invited to its branches. leveraging the branch network (150+ branches across India with roughly 2:1 distribution across North +West and South + East India) is crucial. without significantly diluting its risk profile and there by developing its FI business into a competitive advantage. Chief Financial Inclusion Officer who reports directly to the MD & CEO. PBoI has institutionalized an Inclusive and Social Banking Group. granular lending to ensure that multiple channels of financial inclusion are operational. PBoI’s has consistently exceeded its yearly PSL requirements (Annexure I: PBoI’s financial highlights) through this process and has alleviated the shortcomings of a relatively smaller and less matured branch network. Considering that large tracts of untapped markets. Simultaneously. Page 3 of 9 . RBI wants banks to focus on direct. led by Mr. its mature businesses . PBoI Roadmap for Financial Inclusion PBoI has successfully adopted a two pronged strategy towards its Priority Sector Lending targets and its commitment towards promoting Financial Inclusion. in its first phase of operation. its expertise in Agri business and a B2B model . through structured lending programs. While PBoI is a bank with pan India presence. especially in South and East India exist. to educate them on topical issues like financial literacy. within the Bank. over the next 18-24 months. ground water harvesting etc. typically on weekends. in a profitable manner.strong relationships with corporate engaged in Agribusiness value chain to reach out to the farmers and lending to MFIs. PBoI has also been constantly engaging with the financially excluded community through its branch led Community Programs. enable it to comprehensively cater to the financially excluded segment. While currently. PBoI has relied heavily on its knowledge banking strategy.

e) Credit products: Product suite and structure. Where to pilot. PBoI has always had lowest NPAs among its peer group. h) Marketing strategy consistent with the target segment You are required to develop execution plans along the above lines. how to roll out most efficiently. Your strategy should be consistent with PBoI’s strengths and overall growth plans. prioritize opportunities and incorporate typical portfolio dynamics. c) Technology Driven: Strategy should fully leverage PBoI’s ‘Technology Edge’ including the Mobile Money initiative in collaboration with Obopay and Nokia. d) Comprehensive product offering: Focus on non-credit products – remittances. competitive landscape. thereby ensuring one-stop solution.year on year book/portfolio. you are also expected to develop a business model (projected financials . reduce operating costs and ensure continuous innovation. While the focus should be on understanding the overall business dynamics and proposing innovative yet practical business solutions. monitoring & recovery process to be developed so as to not dilute the Bank’s risk profile.e. delivery. minimize the costs of acquisition and servicing while retaining sufficient control b) Quality of Portfolio: The risks must be commensurate with the returns. reducing risks and increasing RAROC.The key drivers of the strategy should include the following: a) Roll-out of the Strategy: Designed around PBoI branches – to effectively leverage its rural/semi urban presence (Annexure II – PBoI’s branch network – current & proposed). It is critical that you understand the business dynamics of this segment. are familiar with the extant RBI regulations. f) Manageable manpower deployment and cost: As much as possible to be utilized through outsourcing (use of BC model) and technology g) Partnerships: PBoI has typically followed a B2B2C model in most of its businesses i. partnering with companies to ride on their expertise of the specialized firm to accelerate roll out. P&L). Annexure 1 : PBoI’s Financial highlights Annexure 2a : PBoI’s Branch network – current and proposed Annexure 2b : Bank-group and population group-wise number of branches of Scheduled Commercial Banks – March 2009 Annexure 3 : Key RBI regulations Page 4 of 9 . clearly highlighting underlying assumptions. liability products & third party product distribution (micro-insurance) apart from credit products.

5 12.3 19.3 31.0 44.1 Others 24.2 73.5 20.8 100.7 26.7 Business Needs 7.8 1.3 52.1 2.9 100.5 1.0 Total 34.7 38.1 43.2 7.0 100.4 3.4 9.6 All 61.3 14.6 Total 52.5 71.1 26.000 – 100.4 34.2 5.000 – 200.000 95.6 15.0 100.1 9.2 7.Exhibit 1: Earners having Bank Accounts (Percentage of total earners) Annul Income (INR) Urban Rural Total <50.8 16.1 14.4 89.0 From Institutional Sources Financial Emergency 4.4 29.9 200.0 From Non-institutional Sources Financial Emergency 15.8 6.000 34.3 Total 76.8 28.3 Medical Emergency 10.0 100.3 8.000 75.0 Others 36. of Loan Taking Earners (MM) Percent of Loan Taking Earners Purpose of Loan Rural Urban Rural Urban Financial Emergency 20.000 – 400.9 1.0 Medical Emergency 12.0 96.0 0.3 97.0 38.9 >400.6 3.000 91.0 100.3 59.1 100.3 11.5 1.8 Business Needs 3.9 13.9 Medical Emergency 2.6 94.8 43.5 93.2 4.0 17.9 Source: RBI report on Currency & Finance 2006-08 Exhibit 2: Population per Bank Branch (in thousands) Year Rural Urban Total 1969 (June) 82 33 63 1981 (March) 20 17 19 1991 (March) 14 16 14 2001 (March) 16 15 16 2007 (March) 17 13 16 Source: RBI report on Currency & Finance 2006-08 Exhibit 3: Purpose of Loans Purpose of Loan No.000 98.8 87.6 24.0 Source: RBI report on Currency & Finance 2006-08 Page 5 of 9 .1 6.0 Business Needs 3.2 0.5 47.3 50.3 Others 22.

25 *Arranged according to increasing Base Rates Exhibit 5: Base Rate of Some leading Private Sector & Foreign Banks* (as on Sept 15’ 10) Bank Rate (%) Bank Rate (%) Deutsche Bank 6.25 IDBI Bank 8.00 Bank of Baroda 8.00 Axis Bank 7.00 State Bank of Mysore 7.00 Federal Bank 7.00 Indian Overseas Bank 8.50 PBoI Limited 7.75 Kotak Mahindra Bank 7.75 Citibank 7.00 Dena Bank 8.00 Bank of Rajasthan 8.75 Central Bank of India 8.Exhibit 4: Base Rate of Some leading Public Sector Banks* (as on Sept 15’ 10) Bank Rate (%) Bank Rate (%) State Bank of India 7.50 IndusInd Bank 7.75 YES Bank 7.00 State Bank of Bikaner and Jaipur 7.00 South Indian Bank 8.25 Union Bank of India 8.00 State Bank of Travencore 7.00 Punjab National Bank 8.25 *Arranged according to increasing Base Rates Exhibit 6: PBoI’s Inclusive & Social Banking Group – Organizational Structure (50 member team) Page 6 of 9 .50 HDFC Bank 7.10 Standard Chartered 7.50 Allahabad Bank 8.00 ICICI Bank 7.25 Lakshmi Vilas Bank 8.25 Karur Vysya Bank 8.75 UCO Bank 8.00 State Bank of Hyderabad 7.25 HSBC 7.00 DBS Bank 7.00 Bank of India 8.00 Syndicate Bank 8.75 Canara Bank 8.75 Indian Bank 8.

2 Key Ratios:- Key Ratios FY 2010 FY 2009 Return on Equity 23.7 Profit before Tax 727 466 55.702 28.7 Non Interest Income 576 437 31.69 Non Interest Income to Net Revenues 42.Annexure 1: PBoI’s Financial highlights Key Balance Sheet Figures:- March 2010 March 2009 Growth Particulars (INR in cr.5 Others 3. 90.2 Gross NPA Ratio 0.624 90.2 Cost to Income 36.9 Provision for Taxes 249 162 53.7 44.27% 0.7 20.1 Operating Expenses 500 418 19.7 Total Income 1364 946 44.169 65.68% Net NPA Ratio 0.381 17.2 46.901 58.382 22.9 Investments 10.117 43.6% 16.2 Deposits 26.14 Book Value Rs.5 Operating Profits 864 528 63. 15.9 Shareholder’s funds 3.744 1.) (INR in cr.193 12.9 Key Profit & Loss Figures:- March 2010 March 2009 Growth Particulars (INR in cr.799 16.749 3.87 10.06% 0. 14.6 Provisions & contingencies 137 62 121.) (%) Net Interest Income 788 509 54.7 Borrowings 4.65 10.33% Capital Adequacy Ratio (Tier I + Tier II Capital) 20.5 Net Profit after tax 478 304 57.) (INR in cr.901 58.201 7.3 Others 1.406 24.86 54.403 78.6% Page 7 of 9 .7 Total Assets 36.2 Total Liabilities 36.6 Basic Earnings per Share Rs.090 1.382 22.24 Diluted Earnings per Share Rs.979 3.) ( %) Advances 22.

In addition to above. PBoI plans to launch another 100 branches within one year. Page 8 of 9 .Annexure 2a: PBoI’s Branch network – current and proposed Current Branch network:- Proposed Branch network .

org. with a view to rolling them out over the next three years  Financial Inclusion to be made an integral part of the Bank’s business plan  All banks must include criteria on financial inclusion in the performance evaluation of their field staff.Annexure 2b: Bank-group and population group-wise number of branches of scheduled commercial banks -March 2009 Population Group Bank Group Total Branches Rural Semi – urban Urban Metropolitan SBI & Associates 5560 4835 3043 2624 16062 Nationalized 13381 8669 8951 8375 39376 Banks Foreign Banks 4 4 52 233 293 Regional Rural 11626 2746 667 88 15127 Banks Other SCBs 1113 2638 2715 2411 8877 All SCBs 31684 18892 15428 13731 79735 Source: RBI Branch Banking  Background: On November 27.aspx?Id=5795&Mode=0 by March 2011  All domestic commercial banks should submit their specific Board approved Financial Inclusion Plans (FIP) to RBI by 15th March 2010. March 2009 Annexure 3: Key RBI regulations Salient Points from RBI Circular on Financial Inclusion dated 12.aspx?Id=5818&Mode=0 2. Master Circular on Micro Credit http://www. RBI List of Master Circulars Page 9 of 9 . Master Circular – Lending to Priority Sector http://www.  The names of the villages that have been provided with banking connectivity either through BCs or any of the ICT initiatives should be put on the bank’s website RBI Circulars can be accessed at: 1. This aspect should also be included in the Plan. RBI directed that the lead banks may constitute a Sub-Committee of DCCs to draw a roadmap by March 2010 to provide banking services through a banking outlet in every village having a population of over