Defining moment for Indian banks
It is estimated that about 55% employees of public sector banks in India would be retiring in the next decade. This provides a defining moment for these banks to transform by hiring the right talent, right-skilling its workforce and bring about a cultural transformation in the functioning of the banks, asserts Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India.
Why is the next decade likely to be a defining decade? In my view, in the coming years, the Indian banking can unshackle several constraints that it faces today bringing about a transformation into an era of globally competitive banking. The biggest of the constraint has been the legacy of staffing that the public sector banks face. Indian banks employ about 1 million people, three-fourths of which are in public sector banks.
It is estimated that about 55% employees would be retiring in the next decade. This provides a defining moment for these banks to transform by hiring the right talent, right-skilling its workforce and bring about a cultural transformation in the functioning of the banks. There is an opportunity for business process reengineering on the back of manpower transformation.
It can bring in a change in management as well as work ethos. While it may not be possible to quickly move to a fully-flexible wage model, a lot could still be done to link monetary and nonmonetary incentives to productivity and efficiency. As a large cohort of retirees leave, banks can start removing other constraints in Indian banking. There are several drivers that would enhance competition and ensure transformation of the Indian banking sector in the coming years. These include drivers which are external to the bank, regulatory drivers and drivers which are internal to the bank.
External drivers include financial inclusion, growing pool of savings, consolidation, globalisation and competition itself. Regulatory drivers include measures such as regulatory focus on fair treatment to customers and stringent KYC norms, risk management guidelines and reducing entry barriers through new licences to the banks. Internal drivers would be led by manpower change opportunity that the retirements would bring. Banks would need to gear up for winning the 'war' for talent in a competitive market place. If they do so, other external drivers such as newer technologies and newer operating models can follow, enabling banks to improve efficiency. Competition, consolidation and globalisation to re-shape Indian banking Competition in not a choice before the Indian banking. It would come naturally aided by regulatory impulses and increased openness of the Indian economy. Not only will there be increased number of players but the number and type of products and services will undergo a change.
With likelihood of an increasing competition over the next decade, there could be a process of consolidation among banks as has been the case elsewhere in the world. It is expected to be a market-driven process. Cost improvements in output efficiency are likely to emerge from this process as banks seek to reap economies of scale and scope. Mergers could be fruitful for smaller banks so they can increase their scale and expand into new product lines.
The recent financial crisis has reopened debate on the scale and scope economies in the context of big banks being too big to fail. For instance, Nobel laureate, John Vickers clearly advocated splitting large UK banks to combat the problem of too-big-to-fail. In US too, some regulatory features have been added through the Dodd- Frank Act to increase the social utility of the largest, most complex financial firms.
In India, most banks that operate are as yet not of a global size. They are not big enough to be competitive. So our problems are different. We need to develop a vision of banking over next decade that incorporates not only M&A but changes in structure and in operational framework. Banks will need to consider 'end-to-end' operational changes that places customer on the top of the pyramid and then redesign the processes. Our first priority is to bring about universal financial inclusion.
However, once financial inclusion is achieved, banks can focus on consolidation. Competition and consolidation, in turn, may prompt globalisation of Indian banks. India is viewed as one of the biggest growth stories among emerging markets. Trade in goods, services and finance has exploded. Foreign banks are increasingly seeking to be present in India. They could find easier entry through the wholly-owned subsidiary route. Indian banks also have aspiration to turn global. Indian businesses are making overseas acquisitions even as large inward FDI is taking place. This would impel banks to globalise to provide better wholesale and corporate banking services. The focus of competition will, thus, be both on the nature of institutions and products and services. The competition will be intense as there will be diversity in terms of type of institutions as well as products and services. This will drive the costs of products and services down, making it affordable to the entire segment of the society.
Source: Special Address at BANCON 2011 at Chennai on
“Gearing up for the Competitive Impulse in the Indian Banking in its defining decade”
