Unlocking Innovations and Competitive Advantage of …€™s Five Forces in Indian Banking Industry Exhibit 2: Porter’s Five Force Analysis of Indian Banking[10] Source: The merger

Proceedings of International Conference on Strategies inVolatile and Uncertain Environment for Emerging MarketsJuly 14-15, 2017Indian Institute of Technology Delhi, New Delhipp. 38-46

Unlocking Innovations and Competitive Advantage of State Bank of India

Bramhanand Jha1, Anurag Gulati2, Saurav Goyal3 and Sakshi Vig4

Abstract

The world sees toward India as an economic growth engine and India in turn seestowards the SBI for its growth indicators. The largest and oldest bank of India calledState Bank of India is the trend setter for banking in the country. The study covers thejourney of SBI since its inception and tries to understand its contribution to the nationin the past. The turbulent periods in banking sector was analyzed to see the strengthand coping nature of SBI. The width and depth of technologies and innovative initiativeswere analyzed to reveal SBI’s guiding innovation principles. The existing service portfoliowere analyzed and mapped to product, process, position and paradigm innovations.Based on the gap areas and the prospect of emerging technologies, the innovationpotential has been identified from people, process, technology and business modelperspective. The things which has worked in the past would not work in the future andin this context, SBI’s challenges in the current and upcoming market scenarios havebeen identified and innovative solutions to overcome these have been suggested. Allalong the focus has been to understand what innovations SBI has done and what moreit can do to maintain competitive advantage.

Keywords: Artificial Intelligence, Banking Correspondents, Chatbots, Cloud, CoreBanking Solution, Crisis, Demonetization, Digital Payments, Free Innovation, Mobility,Nationalization, Process Innovation, Product Innovation, Public Sector Banks, SocialMedia, Sub-Prime Mobile Wallets.

1. Introduction

The financial sector has attracted the best of the minds at all the contemporaries mainly attributedto charm in money and money making. The finance comprises of three main core businessnamely banking, insurance and pensions. In India, the penetration of banking services is atover 50% much higher than those of insurance and pensions. And in banking services, thetrend setter is none other than the largest and oldest bank of India called State Bank of India.The study covers the competitive advantage of SBI and its innovative solutions, which makesit stand out especially in turbulent times. The focus of study is to under SBI’s leadershipinstinct vis-a-vis its innovations both in physical as well as digital world.

1. Senior Consultant, National e-Governance DivisionEmail: [email protected] / [email protected]

2. Senior Manager, AccentureEmail: [email protected] / [email protected]

3. Senior Associate – Quality Assurance, Sapient Global MarketsEmail: [email protected] / [email protected]

4. Business Analyst, Process 9 TechnologiesEmail: [email protected]

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2. Research Methodology

The research methodology is based on the secondary study of several reports, books andnews articles, interviews, blogs. Focus group discussions and expert opinions have also beenutilized. The reports from Reserve Bank of India, annual reports of SBI and its competitors,news articles have been analyzed. The interviews given by the top leadership of SBI[1,2] andtheir blog were analyzed.

3. Evolution of the State Bank of India

The first bank ‘Bank of Hindostan’ established in India in year 1770 got liquidated by 1832[3].The ‘Bank of Calcutta’ established in 1807, renamed as ‘Bank of Bengal in 1809 and gotmerged with two presidential bank to become Imperial Bank in 1921[4,5,6]. Several banks failedduring two world wars and the trend continued even after 1947[7]. 45 banks failed in 1948 alone.The first phase of banking after independence (1947-1967) witnessed the allocation of majorcredit to the commerce and industry, and the credit to agriculture sector (contributing 55% ofGDP in 1950) declined[8]. Imperial Bank of India was converted into State Bank of India in1955.

Exhibit 1: Journey of State Bank of India since its InceptionSource: multiple books & websites

The Government identified SBI to penetrate rural and unbanked areas. The second phase (1967to 1991) was characterized by the prevailed influence of social controls namely strong nexusbetween the banks and the industry and neglect of agriculture sector[8,9]. The regional ruralbanks established by SBI in late 1970s. In 1980, with nationalization of banks, public-sectorbanks accounted for 91% deposits of the banking sector. The bank’s credit to the agriculturesector increased from 2.2% (1967) to 15.8% (1989). The third phase (period 1992 and beyond)saw the disruption in Indian market with the entry of new private and foreign players. Afterliberalization and financial reforms, the status quo of public sector companies was challengedon vis-à-vis specialized skills, better technology, efficient management practices and greater

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Bramhanand Jha, Anurag Gulati, Saurav Goyal and Sakshi Vig

portfolio diversification. Telecommunication & Aviation sector saw public-sector players (BSNLand Air India) lost leadership position to new entrant and started making losses. SBI stood outas exception and neither lost leadership position nor made any loss till date. SBI became thefirst public sector bank to get listed on the stock exchange. SBI partnered with Tata ConsultancyService in 2002 for centralized core banking system in the country. In 2004, ~700 modificationswere incorporated in the solution. SBI chose Infosys’s Finacle for rollout of CBS for its globaloperations in 12 months. Alternate channels such as mobile phones, internet and ATM to offermore services than only dispensing cash was explored.

Porter’s Five Forces in Indian Banking Industry

Exhibit 2: Porter’s Five Force Analysis of Indian Banking[10]

Source: www.ibef.org

The merger of SBI with associate banks in April 2017 has propelled its position to top 50global banks [11]. Not to relax on the glory, it has set the next target to reach among top 30global banks. The synergy is being exploited towards increased innovative risk assessment, animble approach to SME sector and field force to offer ancillary product sales. SBI empanelsseveral vendors for outsourcing non-core businesses like ATMs, security, application development.It has a preferred bank status from the Government. Its large network of bank branches andATMs especially in Tier-2,3,4 towns give it visibility and customer captivity. SBI has masteredthe art of replicating best innovative practices and scaling up the same but without burningfinger.

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Exhibit 3: Status of ATMs (both off-site and on-site) in IndiaSource: Derived from RBI Data

Exhibit 4: Card Business (both ATM and PoS) in IndiaSource: Table Derived rom RBI Data

4. Resilience during Disruptions in Banking Sector

The resilience of SBI was tested in the sub-prime crisis led recession in 2008.The event led tothe collapse of banks worldwide like falling cards but SBI stood like a rock. It keeps bankingsimple and easy and had less exposure to hedge fund. There was neither mass withdrawal ofmoney nor much change in deposits despite its operations across more than 20 countriesglobally. The Indian banking sector has broken the world record by enrolling more than 1 Crpersons on a single day during the launch of Jan Dhan Yojana in 2014[12]. SBI being the largestPSB bank owned and delivered the largest target and thereby increased CASA. The weaknessesof Indian banking sector were brought to notice by Reserve Bank of India (RBI) in early 2016and it forced the banks to make provision for the weak assets.

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Exhibit 5: Performance of SBI at Stock MarketSource: http://www.moneycontrol.com/

CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratioindicates a lower cost of funds, because banks do not usually give any interests on current account deposits andthe interest on saving accounts is usually very low 3-4%.

The bombshell announcement of demonetization making all INR 500 and INR 1000 as invalidcurrency came in the night of 8th November 2016. All the banks were grappling with situationwithout any hindsight on solution. SBI was the first to come with detailed guidelines in multiplelanguages to sensitize the customers and employees. The retirees were deployed to ensuremore field officials on the ground to deal with matter. SBI used to present near-real-timeinformation to the authority at detailed level such as how many number of persons wearing redshort deposited how much money in which branch. The change in Government’s guidelines onthe withdrawal limit used to cause further chaos in the banking sector but not in SBI. SBIbuddy, USSD, UPI and BHIM were promoted as preferred digital medium of transactions [13].

5. Innovation Principles

SBI deploys innovative initiatives in both physical as well as digital world. It has consistentlyaligned its operation and businesses as per the vision of the Government. Its strategic innovationin choosing the place of branch expansion allowed it to grow where failures of banks were anorm. SBI innovation was slow from 1980 to 1995. In 21st century, SBI has transformed itselflargely on the back of free innovations[14], democratizing innovations[15], flexibility and agility. Thestudy brings out the visibility to below prominent innovation principles followed by SBI:

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Principles Contextual Meaning

Customer Centricity Innovations in digital space for young generationSame love andaffection at bank branchUnlike many banks, SBI does not havehidden charges

Cloud by default Applications and databases of SBI are hosted on cloudOracle Cloudserver hosted within the premises of SBI Also own separate datacenters and disaster recovery sites

Mobile First Deployment through mobile right at conceptualization stage Physicalexpansion only where mobile connectivity is issue

Process Reengineering Use of JAM trinity – Jan Dhan Yojana[12], Aadhaar[16], mobile Use ofData analytics, Social media, Direct Benefit Transfer[17]

Sustainable and I Both purpose worthiness and credit worthiness Funding to prioritynclusive Growth sector - inclusive growthMinimum balance in account - sustainable

growth

Democratization & Crowd sourcing - ideas, product development, serviceFree Innovation deliveryReplication & Scale up best innovative practice in the industry

Human Resource - National-level competitive exams and top B-SchoolsLeadership chosenChoose the best from demonstrated experience in innovations

6. Innovative Products and Services

The leadership position in the market cannot be a fluke considering the time span of over 100years. The market is cruel and it does not spare inefficient companies. SBI knows the basicthat satisfying the customer is not enough but how fast to do so is important. It innovatesunique solutions to attract & retain customers and keeps a hawk eye on the market place toreplicate the best practice after localization.

SBI has recently launched several innovative products in the market. Another important thing isto notice its narrow focus on banking only and not digressing to its other line of business likeInsurance and mutual funds. These innovative initiatives have been grouped as follow:

Product Innovation Process Innovation

SBI Buddy (a mobile wallet) SMS Unhappy– call back from SBI official

SBI Mingle (social media users) Direct Benefit Transfer

State Bank Digi Voucher Call on high value cheque transaction

SBI Video Statement

SBI InTouch (Contactless card)

SBI Green Remit Card (pin-less card)

Position Innovation Paradigm Innovation

Social Media – presence in digital world Premium Banking Centre – for HNIs

Redefined Logo – logo with name Aadhaar enabled services

Defense Banking Advisors – defense business Personal Banking LOGIN lite[18]

SBI In-Cube – engaging and funding start-ups Digital Life Certificate - Jeevan Pramaan[19]

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SBI buddy is giving competition to mobile wallet service providers. SBI Mingle is giving socialmedia users to do banking transaction with differentiated experience. SBI video statement providemulti-media based account information. Aadhaar seeded bank account holders get their governmentbenefits under Direct Benefit Transfer without approaching any official. SBI has unleashed aplethora of applications on social media. Dedicated bank branch for high net-worth individuals,personalized website for rural people having low broadband speed, digital life certificate forpensioners are making banking simple. Many innovative solutions like Jeevan Pramaan, LOGINLite, etc cannot be replicated by its competitors.

7. Innovation Potentials

Innovation is not the destination but more like a journey and a successful company need toalways keep innovating to remain relevant in the business. It is even more useful for SBI as itis having leadership position and attaining leadership is one thing and maintaining leadership isa tough task and needs sustained efforts. Based on upcoming business models and emergingtechnologies, the potential innovation areas for SBI are as follow:

1. People perspective

o Crowdsourcing be extended to next level where visit to bank branch gets eliminated.

o Collaborative application development be tried out through OpenForge[20].

2. Process perspective

o Aadhaar enabled KYC can be used to allow opening of bank account from anywhereand anytime. All services be made available online (without requiring any visit tobranch) for Aadhaar holders. Digital Locker [21] can be utilized for enhanced servicedelivery.

3. Technology perspective

o Chatbots [1] especially voice-based chatbots be tried for better customer experience.

o Artificial Intelligence be used for investment, risk and fraud management.

o Social value chain be employed to make use of influencers to attract business.

o Robot force be utilized for enhancing user feeling and portfolio analytics services.

o Bank of Things [23] (in line with IoT) be explored to enhance user experience.

4. Business model perspective

o Data Monetization –User profiles can be meaning fully shared with its other interestlike mutual fund, insurance business for more business.

o The readiness for rollout of digital currency can be formulated [24].

8. Non-Performing Assets – A Gigantic Challenge

The rise in bad loans or non-performing assets (NPAs) poses the biggest challenge for SBI.Non-Performing assets (NPA) are at an average increasing for SBI and are adversely affectingthe position and performance of SBI. Due to rapid and dynamic changes in the market placeowing to technology, customer behavior and regulations, the banking industry has undergonetremendous change. SBI being the largest of all banks should be ready to handle this challenge.It has taken first move lead in banking sector by holding Mega e-Auction on pan-India basis,identification of un-encumbered properties and attachment of properties before judgement. Toexpedite resolution of legal hurdles, SBI has liasoned and Government / RBI responded byenacting new laws. SBI needs to do more to curb the increase in NPAs (INR 93000 Crore)

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using Data analytics & technology to measure the early warning signals and to highlight thehidden NPAs. They should do a better job of forensic checks to understand the hidden intentsof the borrowers and to develop skills for credit assessment.

The new players in banking sector namely FINTECH companies, payment banks, non-bankingfinancial institutions getting banking licenses are bound to disrupt the banking and challengestatus quo of the existing banks. The block chain technology poses a big risk to banks as itintends to remove banks as an intermediately in financial transaction. The side effects of recentmerger are also a probable issue whereby multiple branches in the same locality can lead tocannibalization and consolidation of NPAs & too many top leaders can hinder performance.

9. Conclusions

SBI has managed to keep pace with change in market dynamics and maintain trust of thecustomers for the best possible and transparent banking solution at the affordable cost. It hasalso managed the banking needs of the Government. But the market dynamics is changingvery fast and to remain at the top of the game, State Bank of India may consider followingsolutions.

• To make use of chatbots, bank of things for enhance customer experience,

• To utilize Aadhaar to deliver all banking services making visit to brank branch useless,

• To track frauds and investments using big data analytics and artificial intelligence,

• To collaborate with innovation / incubation centers working in financial sector,

• To implement branch-wise people and performance management system,

• To be ready with block chain technology for indigenous digital currency,

• To ensure assets screening based artificial intelligence and data analytics, and

• To become partner in digital village initiatives of GoI

References

1. Mahapatra, M. (personal communication, May 9 2017), Oracle Open World Conference, India,New Delhi 2017.

2. KeyNotes, FeatureSpeakers. (n.d.). Retrieved from https://www.oracle.com/in/openworld/index.html.

3. Muesem. (n.d.). Retrieved from https://www.rbi.org.in/scripts/pm_earlyissues.aspx.

4. Rajesh, R., & Sivagnanasithi, T. (2009). Banking Theory: Law & Practice. Tata McGraw-Hill.

5. The Advent of Modern Banking in India. (n.d.). Retreived https://www.rbi.org.in/currency/museumm-1720.html.

6. Rungta, S. (1970). The Rise of Business Corporations in India 1851-1900 (No. 8). CUP Archive

7. Laeven, L., & Valencia, F. (2012). Systemic banking crises database: An update.

8. Mishra, H. K. (1991). Famines and Poverty in India. APH Publishing.

9. Muthiah, S. (2011). Madras miscellany. Westland.

10. Banking Sector in India.(n.d.).Retrieved from https://www.ibef.org.

11. Kneale, K. (2009). World’s Most Reputable Companies: The Rankings. Forbes. May, 6.

12. Pradhan Mantri Jan Dhan Yojna.(n.d.). Retrieved from https://www.pmjdy.gov.in.

13. Digi Dhan Abhiyan.(n.d.).Retrieved from http://digitaljagriti.in.

14. Von Hippel, E., & Von Krogh, G. (2017). FREE INNOVATION. The MIT Press. London, England.Retrieved from https:// https://mitpress.mit.edu/books/free-innovation.

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15. Von Hippel, E. (2005). Democratizing Innovation. The MIT Press. London, England. Retrieved fromhttps://mitpress.mit.edu/books/democratizing-innovation.

16. Aadhar Online Services.(n.d.).Retrieved from https://uidai.gov.in.

17. Direct Benefit Transfer.(n.d.). Retrieved from http://dbtbharat.gov.in.

18. Login Lite.(n.d.).Retrieved from https://www.onlinesbi.com.

19. Jeevan Praman. (n.d.).Welcome to Jeevan Praman : Digital Life Certificate for Pensioners. Retrievedfrom https://jeevanpramaan.gov.in.

20. Open Forge. (n.d.). Government of India’s platform for open collaborative software development ofe-Governance applications. Retrieved from https://openforge.gov.in.

21. Digilocker. How it works? (n.d.).Retrieved from https://digilocker.gov.in.

22. Internet of Things.(2017,March).Retrieved from http://bankinnovation.net/tag/internet-of-things.

23. Press Release regarding IRA.(2017, January 27).Retrieved from http://www.hdfcbank.com/aboutusNews_Room/press_room.html

24. Understand the Fundamentals of IBM block Chain (n.d.). How does block chain work? Retrievedfrom https://www.ibm.com/blockchain/what-is-blockchain.html.

Documents

Unlocking Innovations and Competitive Advantage of …€™s Five Forces in Indian Banking Industry Exhibit 2: Porter’s Five Force Analysis of Indian Banking[10] Source: The merger