1

INDIA CHURNING AICAR BUSINESS SCHOOL

A

STUDY

ON

“Banking in the new millennium:

Paradigm changes and challenges”

Submitted By:

SHAH NITESH B (F.Y. PGDM - 659) PATEL SNEHA R (F.Y. PGDM - 660)

Submitted To:

AICAR BUSINESS SCHOOL

NERAL (MAHARASTRA)

JANUARY 2009

2

CONTENT

Sr No. Particular Page No.

1.

Overview of the Project

3

2.

Introduction

4

3.

New Changes and Challenges of

banking Industry in India

4

4.

HR aspect in Banking Sector

5

5.

Marketing aspect in Banking Sector

8

6.

Other New Challenges in banking

Sectors

12

7.

Conclusion

14

3

Banking in the new millennium: Paradigm changes and challenges

� Overview of the project

Banking is a key driver for growth of the economy .In new millennium; the Indian Banking

Industry is passing through rapid changes reflecting number of underlying development. The

most significant has been advances in information and communication technology. Competition

has become keen and banks are required to provide facility of anywhere and every time banking

to their customers.

Human Resource Development is very important challenge of the banking industry. To meet

the new challenges is absolutely essential that each bank undertake a thorough review on current

practices these areas. “HR crunch” is one of the biggest problems faced by PSU banks.

Employees represent increasingly diverse demographic and cultural backgrounds. To gain and

retain the talent pool is the challenge for the PSUs as they do face competition from their foreign

counterparts.

The 4Ps of marketing mix has become the heart of the banking sector. Factors like better and

innovative products, cost of service delivery, market positioning, and quicker and better services

at convenient place will determine the efficiency of banking. The multiple changes happening

one after other has a ripple effect on a bank to graduate from completely regulated sellers market

to completed deregulated customers market. Customers have become more and more demanding

and knowledgeable.

Indian Banks need to reorient their business strategies to retain and to gain new customers.

Totally new approach towards marketing and HR is necessary to sustain and grow in this

competitive market.

4

� Introduction

“A bank lives on credit. Till it is trusted it is nothing; and when it ceases to be trusted, it

returns to nothing”

Banking is a key driver for growth of the economy. We can identify three distinct

phases in the history of Indian Banking. Early phase from 1786 to 1969 Nationalization of Banks

and up to 1991 prior to banking sector Reforms New phase of Indian Banking with the advent of

Financial & Banking Sector Reforms after 1991.

Banking was never a luxury but always a necessity. Today banking has the element

of luxury with necessity. Post liberalization, several new-generation private sector banks

changed the face of the banking industry. Banking has taken a form of Demand-driven rather

than Supply-driven. Banks have become customer and IT oriented and offer quicker and better

services. Banks are focused on three areas: meet customer's service expectations, cut costs,

and manage competition.

Indian Banking sector is undergoing rapid transformation and is expected to change and

evolve considerably in the near future. Indian banks will have to adopt global best practices in

order to retain their market share and customers as well as to attract new customers for fueling

growth. According to Pricewaterhouse cooper’s report, “India may well be the third largest

banking hub in the world by 2040”.

� New Changes and Challenges of Banking industry in India

The banking industry in India is undergoing a major transformation due to changes in

economic conditions and continuous deregulation. These multiple changes happening one after

other has a ripple effect on a bank to graduate from completely regulated sellers market to

completed deregulated customers market. Being a service industry, customer centric

approach has become necessity. Customers are increasingly segmented, literate and

demanding. To provide good services to customer, it is essential to have very efficient

workforce and even to communicate the value to the customers. That is why is today’s

scenario HR and marketing aspects play very important role for success of a bank.

5

� HR (Human resources) Aspect In Banking Sectors

“ CHANGE IS A RULE OF NATURE” This sentence is very true with the context of banks.

When foreign banks had come up with ATMs in India at that time SBI, one of the biggest banks

of India took a considerable long time to accept it. Now, SBI has one of the largest numbers of

ATMs in India. In the same way, the importance of HR and Marketing has grown at the same

rate at the banks have grown.

� HR - A Major Concern For PSU Banks

In a new millennium, the new challenge faced by PSU (Public Sector Unit) banks is the

“HR crunch”. Years of restricted intake of people has resulted in the thinning waistline of

public sector banks. The government had banned recruitment for 10-15 years. A lot of voluntary

retirements had happened.

Other reason for “HR crunch” could be that the new generation banks are competing for

the same talent. It creates the risk of losing talent not just to their bigger rivals such as ICICI

Bank or HDFC Bank. They also face a threat from BPO firms whose appetite for banking and

finance professional is increasing as Western companies outsource finance and accounting

process. While salaries have started to slow down in outsourcing companies, the wage difference

is still phenomenal.

Because of that PSBs are adopting new criteria for giving promotion and other

motivation to employees for retaining the talented pool. Earlier, promotions were based on

experience; hikes were decided at the top and were applied to employees across organizations.

Employees knew they would get their next promotion in certain number of years, and referred to

HR manuals to see what their salaries are (for they did not differ from person to person in the

same rank).

Now Faced with the possibility of a middle management talent crunch in the coming

years, public sector banks are putting in place an HR scheme to identify potential leaders,

equip them with top class training, give right exposure and fast track promotion.

6

Even today, apart from a few major banks, most members of the Indian Banks’ Association

(IBA) have opted for a collective wage revision rather than individual decisions on

compensation. In the absence of this autonomy, PSBs are trying to incentivize the whole

compensation package by including employee accelerated promotions and overseas assignments.

In new millennium there is totally new platform for banks to perform. There are various

changes that have taken place. Employees represent increasingly diverse demographic

backgrounds. On the one hand, banks are grappling with the challenge of aging employees

while on the other hand; there are the young entrants with altogether different cultural,

ideologies. Customers are increasingly segmented, literate and demanding and so are employee

expectations, which are continuously rising as they gain in education and skills. Investors have

become increasingly attuned to and actively concerned about not only financial results but also

intangibles. Competitors come from both traditional large players but increasingly from smaller

private and foreign banks. These trends are affecting all aspects of banking operations from

managing capital requirements of positioning the bank in the customers’ minds and how to

engineer and deliver newer products and services in tune with the fast changing customer

expectations.

� Key HR concerns for Indian banks:

Under this environment, HR departments are also expected to contribute to business

results with HR practices being more and more integrated, aligned and innovative. A recent

McKinsey report on the Indian Banking sector highlighted some of the key concerns on the HR

front:

Core capabilities of Indian banks, chiefly that of the PSU Banks need radical

improvements which get reflected in low innovation in products and services and / or in

organization and performance attributes.

There are critical challenges faced by Indian banks in the following areas, which put it at

a distinct disadvantage when compared with the global best.

-People development

-Skilling and Re-skilling

7

-Recruitment and Retention of top performers

-Motivation of top performer

Indian banks were found to be clearly lagging behind when compared to global best

practices in

-Communicating clearly their goals to employee

-Shaping an inclusive working environment which encourages entrepreneurial culture

-Motivating employees through performance linked remunerations and incentives

-Recruiting the best talent regularly from the best sources

-Fostering collaboration among employees

-Building a pool of leaders to achieve grow aspirations

� IT and HR

Now, IT is central to banking. Because of new technology coming in to banks, it becomes

a challenge for a bank to provide training regarding new technology and make them

comfortable with the same. The change should be brought in a smooth manner that it does not

create any resistance and negativism among employees. We can have example of SBI bank.

When SBI had started making its branches computerize at that time many employees had taken

VRS (Voluntary Retirement Scheme). The existing old employees were not comfortable with

new computerize system and even they had a fear of making mistakes while using the computers.

This might had created a bad image of bank in the eyes of the employees.

8

� Marketing Aspect In Banking Sector

“The whole focus of marketing in banking today is on ‘customer acquisition’, and so the

communication focus in recent times has been on hammering the ‘competitive edge’. The

banking sector has evolved beyond product attributes as everything is on product parity. It’s

about the service/experience and brand image now. “ Banks are trying to create a halo

around themselves”

Now, each branch of bank works as a marketing unit. The whole accounting activities

have centralized and are done at head office. It works as distribution centre (Place) in the 4Ps

of marketing and provides services to the customers.

� The Marketing Initiative taken by SBI

SBI carried out various marketing initiatives to enhance its reach. They included

segregating and targeting existing high value customers, cross sales of other products,

setting up call centers and outbound sales force to secure new customers. Plans were also

made to utilize database marketing to pursue large and medium sized corporate, government and

trade finance customers. Database marketing was expected to draw increased revenue from cross

selling, lower costs and increased customer loyalty. SBI also introduced various other ways of

reaching out to customers like extension of hours of work and aggressive marketing through

print and television media. SBI increased daily working hours by two hours and Sunday

banking was introduced...

� Do you know your Customers?

KYC (Know Your Customer) is the important aspect in the marketing of banking sectors. As

being a part of the service industry, it becomes very important to know, to understand and

provide value to the customers. Today customers have become very demanding and to retain

them it is required to know what exactly they want and provide service accordingly.

9

� CRM – Do you want to retain your customers?

Banks can leverage on the new inventions of science to develop, design and implement CRM

(Customer Relationship Management) strategies in their business process. Most of the Indian

banks are now turning to CRM as they are increasingly realizing that the cost of acquiring new

customer is far higher than the cost of retaining existing ones. Their quest for more effective

ways to woo and retain customers ends with the implementation of CRM models in their

business practices. They no longer see CRM as an optional and expensive add-on-increasing

competitive market.

� Segmentation –An essential element for better service

There is new trend of segregating the customers based on their requirements and

demands. Banks have also divided their activities base on customers’ requirement. Banks'

activities can be divided into retail banking, dealing directly with individuals; business banking,

providing services to mid-size business; corporate banking dealing with large business entities;

private banking, providing wealth management services to High Net worth Individuals; and

investment banking, relates to helping customers raise funds in the Capital Markets and advising

on mergers and acquisitions. Banks are now moving towards Universal Banking, which is a

combination of commercial banking, investment banking and various other activities including

insurance.

� New Dimension of Banking sector

In marketing mix there are 4 Ps. Here how all 4Ps woks in banking sectors are essential to

understand in order to make effective marketing strategy and future plans.

1. Product

In banking sector the services which banks offer is known as products. Traditional banks

were engaged in only loans and deposits. But today banking products includes totally new set of

10

products. For example, many banks have entered into Para-banking activities in such areas like

mutual funds, leasing, hire-purchase, consumer finance, credit card business etc., by setting up

subsidiaries.

Many business models of banking have also emerged. These new services have added the

extra flavor to the banking arena. New services would include models like Venture Capital

Funding, Islamic Banking Services, Portfolio Management Services, HNI (High Net

Individual) services etc.

2. Price

Here price refers to the cost the customers have to pay in order to gain services. In new

millennium the customers are not ready to pay higher price to its existing bank if he/she can get

the same service at lower rate from anywhere else. So in order to survive, banks have to provide

services at competitive price and always focus on reducing the cost.

Most recently the trend observed in the banking industry is the sharing of ATMs by banks.

Sharing of ATM network will minimize geographical overlap of ATMs and provide better

coverage to customers. At the same time, the sharing helps the banks to develop economies of

scale and minimize the cost of servicing customers. ATM, Net-banking, mobile banking, and

Tele-banking are driving down cost per transaction.

3. Advertisement and Positioning

Ads for Indian banks from the 60s and 70s chose to dwell on the bankable nature of banks —

banks routinely highlighted the better returns they offered on savings, and the element of bank

deposits being safe was never far from the surface.

However, with the rise of retail banking and easy consumer credit, bank advertising

underwent a steady change. First, safety and trust — inseparable parts of the relationships that

11

customers share with banks — began being taken for granted, and banks, instead, chose to

highlight value-added services. Then, as value added services achieved parity status, bank

advertising began taking the emotional or human route. For that matter, many began

projecting themselves as partners and enablers of their customers’ aspirations. And safety and

trust got buried even deeper — even though taglines of ICICI Bank like ‘Hum hain na’

seemingly hark back to ‘reliability’ and ‘trust’, t he accent was rarely on the ‘safety’ of the

depositor’s money.

But in the light of prevailing critical economic scenario, banks need to once again

assure depositors about their ‘stability’ and ‘safety’. “During these challenging times banks

will have to reinforce their core brand message, and ensure that the tone and manner will lead to

a consumer takeout of trust,” It is important that people know the bank has enough liquidity and

minimal exposure to risky assets. “Trust” and “safety” will have to be the consumer takeout

from the advertising.

Take the case of ICICI Bank. When the bank’s stock plummeted to a new 52-week low in the

second week of October, 2008, it was evident that there were no takers for its Main Hoon Na-

ambassador’s hum hain na assurances. In an unprecedented move, the bank had to SMS its

customers, requesting them not to believe any rumours surrounding the bank. ‘Your

deposits with ICICI Bank are safe. Your bank is well capitalized with good liquidity. Please do

not listen to baseless rumours. Happy festive season’. The bank also released print ads

highlighting its sound financial health by putting financial figures and facts upfront. A degree of

normalcy, though, was restored only after Chanda Kochhar, joint managing director & chief

financial officer, and CEO KV Kamath made several appearances on the telly, debunking

rumours about the bank.

Seeing the global crisis and customers are concerned with the safety of their money, “Banks

should tell people a simple thing: ‘Your money is safe’ — provided it is. And that sort of

confidence and reassurance will work wonders in retaining consumers.”

12

4. Place

In banking sector, branches of banks work as distribution unit for providing services to

customers. Even ATM places very essential way for providing services to the customer. In India,

more Indians have mobile phones than bank accounts. Seeing this many banks have started

mobile banking services for their customers. Even Net-banking and Tele-banking are also in.

� New Challenges of Banking Sector in other area

In these days of globalization, liberalization and competition conducting banking

business is itself a challenging task. Other than this, there are many internal and external

challenges, which go to, the core of the banking business, may have to be considered in right

perspective.

First and for most challenge is ever increasing non-performing assets (NPA) of the banks

which has now reached a staggering figure of Rs. 83000 crores. Even the foreign banks

operating in India, have not been able to escape from the phenomena of NPA. According to the

latest newspaper report there has been increase of 25.3% in the volume of NPA. This is indeed

an alarming situation and means and ways to overcome the situation needs to be found.

To retrain the trust of people has become one of the biggest challenges in this new

millennium banking sector. Recently happened City bank crisis has compel the customers to

think about security of their money with the banks. Various scams regarding securities taken

place in Bagpur and financial scam of late Shri Harshad Mehta and urban banks involvement in

stock exchange scam due to unfair practices of a broker and to cap it all the UTI scam has badly

shaken the confidence and trust of a common man in the bank and financial institutes.

According to one survey conducted by Indian Express, out of 10 performing banks only

one is the public sector bank and that also ranks nine. In order to change this picture internal

administration of the banks including man management will have to be drastically improved.

Employees of the banks will have to give efficient customer service. Advertisement like

13

banking service available on 365 days and day and night customer service even on holidays

is coming from multinational foreign banks. The banking sector will have to develop a new

strategy. The government should take steps to see that process of privatization of banks is

expected.

The growing foreign trade in goods and services will have to be financed. Apart from

production credit, financing capital requirement from the cheapest sources will become

necessary. Provision of a whole gamut of services related to integration with the rest of the world

will be challenge. Foreign banks operating in India will be the competition to Indian banks in

this regard. Foreign banks have access to much larger resources and have presences in many

parts of world. Therefore Indian banks have to strive to get funds at competitive rates.

14

Conclusion

Banking sector plays very important role for the growth of the economy. In the new

millennium Indian banking sector has gone through rapid changes and many more changes and

challenges are likely to come. Whole banking industry has become customer centric. It is very

important to provide value to customer and maintain the trust with them. For that marketing has

gain a lot of importance. Even customers have become more and more demanding and want the

best and quicker services. For that to gain and maintain the talented and customer centric

workforce has become very challenging task for the banks.

So we would like to conclude that seeing today’s economic scenario banking business

itself has become big challenge. But Indian banking is in good condition and there will be many

opportunities to grow. According to Pricewaterhouse cooper’s report, “India may well be the

third largest banking hub in the world by 2040”. So it is very necessary to have right approach

and greater professionalism.

15

Bibliography

1) New Challenges in Banking Sectors

Publishing House: - Prabohan Prakashan, Mumbai-400 025

2) Bank Quest(Human Resources in Banks)

Publishing House:-Indian Institute of Banking and Finance,

Mumbai-400 005

3) The Indian Banking System Challenges Ahead by Dr.C.Rangarajan

Publishing House:-Indian Institute of Banking and Finance,

Mumbai-400 005

4) Banking in the new millennium by Prof. Guru Prasad

5) Business Today magazine

Web site: www.businesstoday.in

6) www.banknetindia.com

7) www.economictimes.com