Case Analysis: PNB

University Business School

2014-15

Case Analysis: Punjab National Bank

Submitted to: Prof. Karamjit Singh,

Professor, University business school

Panjab University, Chandigarh

Submitted by: Payal Gupta & Preeti Kaushal

ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible without the kind

support and help of many individuals and organizations. I would like to extend my sincere thanks

to all of them.

I am highly indebted to Prof. Karamjeet Singh for his guidance and constant supervision as well

as for providing necessary information regarding the project & also for their support in completing

the project.

I would like to express my gratitude towards the author of the book Strategic Management, Theory

and Practice, John Parnell, Ph.D. without which this project would not have been a success.

I would like to express my special gratitude and thanks to industry persons for making the

information regarding their organisations available on the internet, which was a crucial input to this

project.

My thanks and appreciations also go to my colleague in developing the project and people who

have willingly helped me out with their abilities.

THE ORGANISATION

The name you can BANK upon!

Type Public

Traded as BSE: 532461

NSE: PNB

CNX Nifty Constituent

Industry Banking, Financial services

Founded 19 May 1894

Founder Lala Lajpat Rai

Headquarters New Delhi, Delhi, India

Key people Sh. K.V. Brahmaji Rao (Executive

Director)

Products Credit cards, consumer banking,

corporate banking, finance and

insurance, investment

banking, mortgage loans, private

banking, private equity, wealth

management

Revenue

47400 crore (US$7.5 billion)(2013)

Net income INR 49.54 billion ( million)

(2013)

Total assets 566291 ( billion) (as on December

2014)

Owner Government of India

Number of

employees

62,392 (March 2013)

Website www.pnbindia.in

Punjab National Bank is an Indian financial services company based in New Delhi, Delhi, India.

Founded in 1894, the bank has over 6,300 branches and over 7,900 ATMs across 764 cities. It

serves over 80 million customers.

Punjab National Bank is one of the Big Four banks of India, along with State Bank of India, ICICI

Bank and Bank of Baroda. It is the third largest bank in India in terms of asset size (billion by the

end of FY 2012-13). The bank has been ranked 248th biggest bank in the world by the Bankers'

Almanac.

PNB has a banking subsidiary in the UK, as well as branches in Hong Kong, Dubai and Kabul. It

has representative offices in Almaty (Kazakhstan), Dubai, Shanghai (China), Oslo (Norway)

and Sydney (Australia).

PNB was born on May 19, 1894. The Bank opened for business on 12 April, 1895. In 1913, the

banking industry in India was hit by a severe crisis following the failure of the Peoples Bank of

India founded by Lala Harkishan Lal. As many as 78 banks failed during this crisis. Punjab

National Bank survived.

The five years from 1941 to 1946 were ones of unprecedented growth. From a modest base of 71,

the number of branches increased to 278. Deposits grew from Rs. 10 crores to Rs. 62 crores.

In 1951, the Bank took over the assets and liabilities of Bharat Bank Ltd. and became the second

largest bank in the private sector. In 1962, it amalgamated the Indo-Commercial Bank with it. From

its dwindled deposits of Rs. 43 crores in 1949 it rose to cross the Rs. 355 crores mark by the July

1969. Its number of offices had increased to 569 and advances from Rs. 19 crores in 1949 to Rs.

243 crores by July 1969 when it was nationalised.

VISION

“To be a Leading Global Bank with Pan India footprints and become a household brand in the

Indo-Gangetic Plains, providing entire range of financial products and services under one roof.”

MISSION

“Banking for the unbanked”

Acquisitions by PNB

1939: PNB acquired Bhagwandas Bank

1951: PNB acquired the 39 branches of Bharat Bank.

1961: PNB acquired Universal Bank of India

1960s: PNB amalgamated Indo Commercial Bank

1986: PNB acquired Hindustan Commercial Bank

1993: PNB acquired New Bank of India

2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala

Financial position

THE INDUSTRY AND THE COMPETITORS

The Indian banking sector consists of 28 public sector banks, 23 private sector banks and 28

foreign banks along with 133 regional rural banks (RRBs) and more than 90,000 credit

cooperatives.

Structure of the Indian Banking Industry

The aggregate deposits reached Rs 85,331 billion as at the end of 31st March 2014 while the

Bank credit increased from Rs.5 billion to Rs 67352 billion during the same period.

There was massive branch expansion from 8262 in 1969 to 1,16,450 in 2014. Public Sector Banks

(PSBs) in India have been the major player in the Indian banking system with their market at

72.1% (31st Mar'14). They are distantly followed by New Private Banks (15.9%), Foreign Banks

(7.2%) and Old Private Banks (4.9%).

Bank’s Business (Amt in Rs. Cr.)

Business parameters 31.03.13 31.03.14 31.12.2014 30.03.2015

Total Global Business 7,00,356 8,00,666 8,46,634 8,52,039

Global Deposits 3,91,560 4,51,397 4,84,138 4,86,815

Core Domestic Deposits 3,18,471 3,85,812 4,06,680 4,14,812

CASA Share % 39.16% 38.30% 35.76% 35%

Net Advances 3,08,796 3,49,269 3,62,496 3,65,225

Core Deposit Circles Shown Positive variation :61

Credit Circles shown Positive variation: 44

As.on 17.10.2014

Deposit Growth: Banking System 12.6% PNB 9.0%

Net Bank Credit Growth: Banking System 11.1% PNB 10.6%

Q2 and H1 FY’15

Source PNB Monthly Review December 2015

TOP LINE: BALANCE SHEET

Source PNB Monthly Review December 2015

Source PNB Monthly Review December 2015

BOTTOM LINE: PROFIT & LOSS

GROWTH (YoY%)

Source PNB Monthly Review December 2015

RATIO OF PEERS H1 FY’15

Source PNB Monthly Review December 2015

Source PNB Monthly Review December 2015

The Indian banks witnessed a low credit growth and increasing stressed assets during the Q2 and

H1 FY15. The Gross NPAs of public-sector banks stood at 5.32% of their gross advances as at

the end of September'14, compared with 4.72% in March'14. Similarly, restructured loans as a

percentage of total gross advances rose to 7.25% from 7.17% during this period. This has affected

the profitability of the banks.

However, with the reforms and developments on the policy front from the Government in the areas

of coal, sugar, power sector, etc., the banking sector can see the light on the other side of the long

and dark tunnel of NPAs. The banks still need to carefully watch the developments and should

strengthen its risk and credit appraisal system.

POTENTIAL PROFITABILITY OF THE INDUSTRY

The ongoing financial sector reforms since 1991 have contributed significantly to the increased

competition in the banking industry. The increasing deregulation, coupled with growing

disintermediation has resulted in squeezing margins with rather no control on operational

expenses. The relatively higher growth rate of deposits and lack of lending opportunities on

account of increasing delinquencies has resulted in lower growth of the business. This has

negative effect on the bottom-line parameter of the banks. With revenues of Indian banks growing

fourfold and profits nine times, the future seems to be positive for Indian banks.

The Government proposed to set up an autonomous Bank Board Bureau to select heads of PSBs

and to help them developing strategy including capital raising through innovative means. This

would be an interim step towards establishing a holding and investment Company for Banks.

Government introduced Gold Monetisation Scheme. The new scheme will allow the depositors of

gold to earn interest in their metal account and the jewellers to obtain loans in their metal account.

Banks/other dealers would also be able to monetize this gold.

Banks possess inherent competitive advantages in the digital world. They have large customer

bases; vast amounts of customer and transaction data; and capabilities to enable payments,

security, and financing – all of which are tough to replicate. Instead of simply enabling customers

to save money and pay for things, banks have the potential to combine their vast transaction data

with new digital tools to help customers make decisions on what to buy, and where and when to

buy it – whether it’s dinner and a movie or a new home.

With Government promoting the entrepreneurship, infrastructure and industrial sector of the

country, there is an improvement expected in the employment front and income level. Such

initiatives will pave way for lot of opportunities for the banking sector in India as well.

Double financial repression: The Indian banking balance sheet is suffering from 'double financial

repression'. On the liabilities side, high inflation lowered real rates of return on deposits. On the

assets side, Statutory Liquidity Ratio (SLR) and Priority Sector Lending (PSL) requirements have

depressed returns to bank assets. As inflation moderates and the banking sector exits liability-side

repression, it is a good time to consider addressing the asset-side counterpart.

As regards banking industry in India a four D solution; deregulation, differentiation, diversification

and disinterring, meaning improving exit mechanisms, can help the industry grow.

Reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from

22.0 % to 21.5 % of their NDTL with effect from the fortnight beginning February 7, 2015.

Reduction of SLR will release additional liquidity into the system to the extent of around Rs 45,000

cr which may enable the banks to lend to the productive sectors of the economy.

This may further increase the quantum of excess SLR (as banks are already maintaining SLR

more than the prudential limit) enabling banks to have better Liquidity Coverage Ratio (LCR). ·

Earlier the banks were allowed to borrow from RBI through export credit refinance (ECR) window

to the extent of 32% of their export credit outstanding @ repo rate i.e. 7.75% at present. Now this

liquidity window is dispensed with. Banks can borrow from Liquidity window of RBI when they are

short of liquidity. RBI feels that availability of liquidity through this window is less than 50% of the

available funds which shows easy liquidity condition in the system.

RBI's decision of reducing SLR will help the banks in infusion of liquidity and maintenance of LCR.

Changes proposed to be introduced on restructuring front will be helpful for banks. Allowing banks

to devise products for non-callable differential rate deposits will help solving the asset-liability

mismatch problems of the banks.

Economy’s speedy decision making in clearing some stalled infra and industrial projects in the

recent few months is a positive move for banking industry. In addition, initiatives such as making

online environmental and forest clearances for industrial projects, have generated a lot of

enthusiasm among the corporate sector and investors. This opportunity is favourable for Bankers

as many corporate and Industrial houses dealing with the banking sector were facing such issues.

Sometimes the loans were sanctioned with certain conditions to be fulfilled which obviously were

not in the hands of borrowers or the sanctioning Authority. There are 20 banks which have higher

share in the total stressed advances of all SCBs than their share in the total advances of SCBs.

These 20 banks together have 43 per cent of the total SCB loans and contribute around 60 per

cent of the total stressed advances of the banking system. So if such clearances have been

provided by the Government, they will open up many opportunities for the bankers to repair their

asset quality and increase profitability.

What opportunities exist for the industry?

Retail banking has huge growth opportunities in India and it has to conquer many more heights

before getting exhausted like its counter parts in developed markets like US and Europe. The

customer deposit garnered by retail banking represents an extremely important source of stable

funding for most banks. In this context, it is essential for the banks to keep pushing the frontiers of

innovation and experimentation in the retail banking space to survive and also to remain relevant.

The retail segment is relatively less risky as the NPA levels are low compare to corporate sector

and offers relatively high returns. In addition, there is scope to increase fee based income in terms

of administration/processing fees. Today, banks are viewing retail banking as an attractive market

segment with opportunities for growth with profits. With the growing middle class segments,

increasing opportunities in the rural India, young generation employed at higher packages, all the

banks are increasingly adopting the strategy of 'Go retail'. All the banks in India are evolving

strategies to tap this emerging retail banking market. Hence the changing banking environment

has, in a way, compelled banks to look at retail banking as a solution to some of their immediate

concerns. There has been a greater amount of consumerism in the country. Some analysts term

this phenomenon as middle-class bubble' or mass affluence in restricted sense. The fact remains

that there has been an up spring in the income levels of people who can afford to reach higher

levels of expenditures. This has opened up opportunities for banks to intervene and offer various

products to suit different segments of the retail market. The retail market is enlarging and

accordingly the scope for retail banking is on the upswing. The increasing income levels of the

middle class in tandem with the depressed stock/real estate market also offers substantial scope

for developing and offering new deposit products by banks. There is growing scope for cross-

selling various other retail products like credit card, insurance, mutual fund lined products, demat

facilities and so on to depositors. Most banks have not been able to take full advantage of 'cross-

selling' of products and services, which is the very essence of retail banking. It is imperative that

banks intending to enter/expand retail banking should first identify the segments that they are

capable of servicing and accordingly evolve products and services.

Financial inclusion: Growth in banking especially retail is also due to thrust from the

regulators/policymakers on inclusive growth in the wake of the global financial crisis. We in India,

have also been promoting a bank-led financial inclusion model and retail mass banking is the

stepping stone towards achievement of universal financial inclusion. Considering that nearly 50%

of total population of the country is still untouched by the formal financial institutions, FI will open

up a plethora of opportunities to the banks in general and PSBs in particular.

Technology: The increasing application of technology (or computerization) in the banking sector,

more so in the case of PSBs in the country is regarded as 'not by choice' rather a compulsion. It is

also true that banks have not been able to exploit the technology to the fullest and therefore, some

amount of scepticism in some circles about the cost-benefit relationship is not totally baseless.

Having invested huge amounts in technology (also training), now banks can make optimal use of

the same. Globally retail banks rely on electronic networks and web-based strategies. A fully

integrated financial automation system is a precondition for the successful retail banking and in the

process it is possible to reduce the transaction cost and enhance customer service. With regard to

range of products and services offered under retail banking, there is no perceptible difference

except that of the nomenclatures of schemes and this holds good particularly in the case of PSBs.

Technology has brought in a wave of revolution in the banking sector in terms of service delivery.

It has helped banks to reach the doorstep of the customer by overcoming the limitations on

physical reach in branch banking. A combination of regulatory and market forces has supported

the implementation of technology and automation in the Indian banking industry. In today’s

technologically advanced environment, Core Banking Solution (CBS) does not remain an edge

anymore, but has become the basic prerequisite for any bank. Infact banks have moved from the

CBS to ATMs, Internet banking, Mobile banking and Tablet-based banking. These channels are

designed to create a “wow” experience for the customers, thereby capturing these channels’ full

sales potential.

Data about the customers, collected apart from Customer-relationship-management, transaction

histories generated through mobile-phone and use of point-of sale (POS) devices can greatly

assist the process of risk management

‘Make in India’ Concept: Government has identified 25 sectors which will help the country to

boost its manufactures sector. In this scenario, MSME sector will have chances to grow further

thereby giving an opportunity for the banking industry. Manufacturing as well as service sector will

get a boost. The above measures will help generating employment and income of the society. This

will also boost the export sector of the country. All these scenarios will augment the credit demand

and also make cash flows vibrant.

Structuring of stressed Project Loans: The Reserve Bank of India, on December 15, 2014,

allowed scheduled commercial banks (excluding local area banks and regional rural banks) to

flexibly structure the existing project loans to infrastructure projects and core industries projects,

with the option to periodically refinance these loans as per certain norms. This can help banks look

into the aspect and this may revitalize the project and give a sound opportunity to the banks.

Housing & Education to all: The aim of the Government towards Housing and education to all

will boost the economy. As far as housing for all is concerned, there will be increased demand for

construction material and will create job opportunities for the people. From the Banking

perspective, there will be increased demand for loans from this sector which will boost credit

growth and interest income.

Similarly, education for all ensures that every child in India is not deprived of education of one's

choice. Education loans by the Banks will enable the future of India to pursue the education of his

desire. This will also benefit the banking system by not just increasing its credit portfolio but also

creating a pool of future customers with them.

The concept of Smart Cities: The Government of India is promoting the creation of 'smart city' in

India wherein a city will developed in terms of overall infrastructure, sustainable real estate, and

communications and market viability. Smart city will have information technology as the principal

infrastructure and the basis for providing essential services to residents. Developing such cities in

India will entail huge cost thereby generating the demand for credit from the Infrastructure sector.

The Bank should prepare them for meeting the rising expectations.

What threats exist for the industry?

Role of third parties: Banks are engaging the third parties like Advocates, Valuers, Chartered

accountants, Lender engineers in marketing/ delivering their retail banking products. Any

professional deficiency of these personnel will lead the Banks to the reputation risk besides

operational risk. Hence banks should have effective mechanism on due diligence of these parties.

Competition: The financial services market is highly over-leveraged in India. Competition is

fierce, particularly from local private banks, New Generation Pvt. banks, Foreign banks and

NBFCs in the business of home, car, consumer loans. All banks are targeting the fluffiest segment

i.e. the upwardly mobile urban salaried class. Overdependence on this segment is bound to bring

in inflexibility in the business.

Commissions & Charges: Commissions are earned on sales of third party products and on

activities like Issuance of BG /LC, Discounting of Bills etc and Charges are applied on non

maintenance of requisite balances (AMB/AQB etc) and on maintenance of accounts, high cash

transactions, high ATM usage, branch visits etc and these varies from Bank to Bank and customer

to customer. Over all slow down in business and investments have impacted the revenue streams

of the banks and in order to retain good customers in the fold most of the banks are now offering

most of the products and services free of charges. As a result revenues from Commission &

Charges are now moving downwards impacting the profitability.

Ever growing Operating Cost: Against the shrinking NIMs and Commission & Charges,

Operating cost has been rising alarmingly, whether it's the compensation, infrastructure or the

technological investments and maintenance cost which are fixed in nature and are difficult to

control. All the above parameters have led to a situation where cost to income ratio is all set to

drain banks' profitability in the short term and sustainability in the long term.

Saturation at Urban & Semi-Urban centres on acquisition of new customers and low

profitability of customers in the rural markets: It is very difficult to find a person without having

bank account at Metro, Urban and Semi- Urban areas. Switching customers from one bank to

another is very common in these areas than acquiring and this has impacted the free flow on

CASA float by way of large acquisition for banks over the last few years. And most of the banks

are not keen on going to rural markets as the scope of business does not justify the cost of

operation.

Large chunk of inoperative accounts: On one side the acquisition numbers have dropped

drastically and on the other side large chunk of data base is filled with inoperative accounts, that

are either dormant or belong to once in a blue moon customers. Banks have been taking solace in

management mantras like 20:80, whereby 20% provides business of 80% and vice-versa. But that

logic no more looks practical as free flow of CASA from new acquisition is drying up every day and

no new customer is willing to open an account at an additional cost for them rather new accounts

which are switched from other banks are acquired at a higher cost now by adding many freebies.

Low level of customer loyalty resulting in switching of banks: Customer loyalty is something

Banks in India have failed to attract, notwithstanding the higher acquisition and maintenance cost

compared to pre globalization era. The availability of same set of products and services across

banks with no difference does not attract customer loyalty and wherever they see lower charges

and fees or lower interest rates, prefer to switch their account. The logic of hooking the customers

with multiple products will act as forced loyalty for the bank but with concepts like account

portability coming in, Banks will find it difficult to retain their customers resulting in high volatility of

portfolios impacting profitability.

Competition from non banking entities: Nowadays NBFCs, Mobile operators and Retail chains

like Walmart are providing various payment products like Credit Cards, Mobile payment services

etc to customers with little requirements compared to Banks and similarly Investment advisory

services offered by various NBFCs have diminished Banks' role as the IAS (Investment Advisory

Service) provider. Further NBFCs, Micro finance companies have succeeded in providing easy

and quick finances like Gold Loan, Housing Loan, Mortgage loan etc to customers resulting in

erosion of potential business for Banks and if the trend continues, banks will struggle to retain

customers and lose them to other businesses offering banking products & services at a better

price and pace.

White label ATMS (Private ATMs) around, will attract many customers to use non Bank ATMS

which will further add to the cost of running Banks and dent their profitability.

The banks are facing tougher competition, dwindling profit margins and reducing negotiating

power.

NBFCs registered with RBI and having asset base of Rs 5 billion and above will be considered as

'Financial Institution' in terms of the SARFAESI Act 2002.

Challenges for banking Industry

Delivery Mechanism: While there is not much scope for the banks to differentiate their product

and service offerings in so far as the basic products are concerned, it is important for the bank to

enhance the customer experience by ensuring that the services are made available whenever and

wherever the customer demands them. The banks should be able to deliver the products and

services to the customers in safe, secure, prompt and cost effective manner by leveraging

technology.

A new generation of the workforce will be working alongside an older generation as a team.

Banking, in my opinion is a team work and this new situation will require cultural adjustments and

therefore, change management.

Public sector banks have opened more number of branches across the country over the past few

years but it is the private sector where most of the hirings have happened, according to latest data

released by the Reserve Bank of India. According to RBI, one in every four bank employees works

with a private bank today, a sharp rise from one in 10 in 2005. With the growing size of the banks

and declining size of the workforce (due to mass retirements).

Continuous skill up-gradation to cope up with rapid technological changes transforms business.

Banks today need a 'digital workforce' to converge diverse platforms like mobile solutions, social

media, biometrics, etc. to render seamless and highly customized banking services.

Cyber attacks have grown multi-fold and have become highly sophisticated in nature.

Business models of banks, telecom operators and other stakeholders need to converge to

effectively deliver the services to the customers.

Double financial repression: The Indian banking balance sheet is suffering from 'double financial

repression'. On the liabilities side, high inflation lowered real rates of return on deposits. On the

assets side, Statutory Liquidity Ratio (SLR) and Priority Sector Lending (PSL) requirements have

depressed returns to bank assets. As inflation moderates and the banking sector exits liability-side

repression, it is a good time to consider addressing the asset-side counterpart.

NBFCs: Non-banks are taking advantage by proceeding aggressively with digital innovations and

capturing more and more of the banking value chain. Accenture estimates that competition from

non-banks could erode one-third of traditional bank revenues by 2020. Payments, a source of up-

to one-quarter of traditional bank revenues, are one of the most contested areas. PayPal is now

the number one online payment method in some countries, and start-up companies like Square

and Stripe are earning multi-billion dollar valuations. Retailers are also moving in as well: nearly

one-third of domestic Starbucks revenues are paid through its own loyalty cards. Non-banks are

also edging into other core areas like checking and savings as well. Google recently introduced a

plastic debit card for its Google Wallet. T-Mobile launched a new checking service with a

smartphone app and ATM card. Walmart teamed up with American Express to launch a prepaid

card that functions like a debit account; it captured more than a million customers in less than a

year. Technology giants, telcos, and retailers have a long way to go to compete against banks

product-for-product and service-for-service, and many believe that regulatory barriers will dampen

disruption. But new entrants already pose a threat to banks by raising service expectations and

creating distance between banks and their customers. The risk for banks is that new competitors

will consign them to a limited role as back-office utilities, while non-banks become the new face of

their customers’ financial lives. The rise of private-label banks, like The Bancorp, which power the

new offerings — not only by upstarts like Simple and Moven but by major players likes T-Mobile

and Google — shows how regulatory barriers are lower than they seem.

FIVE FORCES SHAPING BANKING

Rivalry among the industry: Rivalry in banking industry is very high. There are so many private,

public, co-operative and non-financial institutions operating in the industry. They are fighting for

same customers. Due to government liberalization and globalization policy, banking sector

became open for everybody. So, newer and newer private and foreign firms are opening their

branches in India. This has intensified the competition. The factors that have contributed to

increase in rivalry are:

Number of players: There are so many banks and non-financial institutions fighting for the same

pie which has intensified competition.

High market growth rate: India is seen as one of the biggest market place and growth rate in

Indian banking industry is also very high. This has ignited the competition.

Low switching cost: Customer switching cost is very low. They can easily switch from one bank to

another bank and very little loyalty exists.

Undifferentiated services: Almost every bank provides similar services. No differentiation exists.

Every bank tries to copy each other’s services and technology, which increases the level of

competition.

Low government regulations: There are low regulations to start a new business due to the LPG

policy adopted by India post 1991. So, sector is open for everybody.

Bargaining power of suppliers: Suppliers of banks are depositors. These are those people who

have excess money and prefer regular income and safety. In banking industry suppliers have low

bargaining power.

Following are the reasons for low bargaining power of suppliers:

Nature of suppliers: Suppliers of banks are generally those people who prefer low risk and those

who need regular income and safety as well. Bank is best place for them to deposit their surplus

money. They believe that banks are safer than other investment alternatives. So, they do not

consider other alternatives very seriously, which lowers their bargaining power.

Few alternatives: Suppliers are risk averters and want regular income. So, they have few

alternatives available with them to invest like Treasury bills, government bonds. So, few

alternatives lower their bargaining power.

RBI Rules and Regulations: Banks are subject to RBI rules and regulations. Banks have to behave

in the way that RBI wants. So, RBI takes all decisions relating to interest rates. This reduces

suppliers bargaining power.

Suppliers are not concentrated: Banking industry’s suppliers are not concentrated. There are

numerous suppliers with negligible portion to offer. So, this reduces their bargaining power. If they

were concentrated then they can bargain with banks or can collectively invest in other non risky

projects.

Forward integration: Forward integration is possible like mutual funds, but only few people now

about this. Only educated people can forwardly integrate where as a large number of suppliers are

unaware about these alternatives.

Bargaining power of customers: Customers of the banks are those who take loans, advances

and use services of banks. Customers have high bargaining power. Following are the reasons for

high bargaining power of customers:

Large number of players: Customers have very large number of alternatives. There are so many

banks, which fight for the same pie. There are many non-financial institutions which have also

jumped into this business. There are foreign banks, private banks, cooperative banks and

development banks together with the specialized financial companies that provide finance to

customers. These all increase preferences for customers.

Low switching cost: Cost of switching from one bank to another is low. Banks are also providing

zero balance account and other types of facilities. They are free to select any bank„s service.

Switching costs are becoming lower with internet banking gaining momentum and as a result

consumers‟ loyalties are harder to retain.

Undifferentiated service: Banks provide merely similar services. There is not much difference in

services provided by different banks. So, bargaining power of customers increases. They cannot

be charged for differentiation.

Full information about the market: Customers have full information about the market. Internet has

increased the customer’s access to information. So, banks have to be more competitive and

customer friendly to serve them.

Threat of substitutes: Competition from the non-banking financial sector is increasing rapidly.

The threat of substitute products is very high. These new products include credit unions and

investment houses. One feature of using an investment house is that the fees that the investment

house charges are tax deductible, whereas for a bank it is considered a personal expense, which

is not tax deductible. The rate of return with using investment houses is greater than a bank. There

are other substitutes as well for banks like mutual funds, stocks (shares), government securities,

debentures, gold, real estate etc. so, there is a high threat from substitutes. DFIs and NBFCs are

posing a fierce competition to the banks. New entrants have been nibbling at the banking value

chain since before the global financial crisis. This has intensified following the crisis as trust in

traditional banks has eroded and customers have turned to other organizations to meet their

borrowing and investment needs. Some of these organizations have been welcomed by

governments and regulators, particularly as a source of finance for small and medium-sized

businesses. Banks must respond to defend their position.

Increased Competition among universal banking value chain

Threat of new entrant: Barriers to entry in banking industry no longer exist. So, lots of private and

foreign banks are entering in the market. Product differentiation is low and exit is difficult. So,

every bank strives to survive in highly competitive market. So, we see intense competition and

mergers and acquisitions. Government policies are supportive to start a new bank. There are less

statutory requirements needed to start a new venture. Every bank tries to achieve economies of

scale through use of technology and selecting and training manpower.

The New Bank Customer

There will be profound changes in consumer and business profiles over the next decade.

Demographic, social and technological factors will fragment customer needs, tastes and

references. As people live longer, travel more and work and play “virtually,” banks will not only

have to manage their costs, but also refine their value propositions and service concepts if they

are to compete effectively. As banks look for ways to design specific products and services to

address these changes, packaging, labelling and category management will become crucial.

Diminished public confidence in the banking system will force banks to re-learn how to

communicate their service offerings and restore consumer confidence.

How can banks serve these various segments profitably? Tailoring products and distribution to

each segment will be difficult and expensive, as geographic boundaries will fade. Even with the

Internet, it is difficult for banks to operate outside their home countries. What choices must be

made?

Consistency: A consistent approach to defining product offerings, channels, brands and cost-

efficient delivery will be essential. Banks will have to satisfy dozens of customer segments from a

single product “factory,”

Flexibility: Flexible delivery will be essential. For example; can a college savings account be fed

by monthly allowances from two accounts in different countries? Banks will have to bundle existing

accounts into packages tailored to meet such specific needs.

Information technology: All of the ideas discussed so far can be realized, but they require the

right IT infrastructures.

Branch banking: While the Internet will be a dominant channel for transaction banking and

investment decisions, more complex customer needs will still require some form of local branch

office. New models are already emerging in Europe and Australia. These branches do not handle

cash or valuables, but rather they serve as a kind of “foyer,” with ATMs to handle cash

transactions, laptop computers to initiate services, scanners to process required documentation

and printers to produce necessary paperwork. Although bank employees are present in these

bank foyers, they operate more in the role of “financial butlers.” Business hours are flexibly geared

to early morning, lunchtime and early evening peak traffic. With the elimination of cash, the

atmosphere has transformed from a secured, limited-access environment to one that is open.

During low-traffic periods, staffers can visit elderly customers who have subscribed to a home

delivery package. This is what new-generation retail banking looks like.

Brands and service models: Brands will keep their unique identity but will need to be associated

with emerging communities. One customer segment may need an affiliation with social networking

brands, while another may need to be associated with a care provider. It is unlikely that a single

brand will be able to cover all segments. Banking, there might be a concept for customers who

want their bank to be based on Islamic principles. There is another concept for young people who

want instant gratification (as is the norm with iTunes) and still another for older people who may be

more interested in home delivery. Mixing these different service models will require some skill and

may seem daunting at first; however, such mixing has been practiced for years by booksellers and

by restaurant chains that provide take-away meals and in-house seating. In short, the best banks

will set up specific service delivery and channels for each segment, and track cross-channel needs

and preferences, without adding cost.

Banking on business: As the economy evolves, businesses will also face new challenges. Many

companies have already leveraged existing credit lines and hoarded cash, postponed investment

and trimmed their workforce. Stock-market valuations may favor mergers and acquisitions. No

longer can banks be guided by historical patterns—they’ve become obsolete. Thus banks must

take a segmented approach to developing new service models for the corporate market.

What the future might hold for key banking functions:

Ecosystems as a segment. Businesses have been coalescing into networks that supply each

other, much like nature’s ecosystems. These ecosystems actually operate as virtual

conglomerates, linked by strong information backbones. Suppliers exchange production and

ordering messages electronically using a special protocol, and they are able to orchestrate a

highly efficient supply chain. It’s only a matter of time before this ecosystem begins organizing

tenders for banks to bid on financing or cash-management services. Few banks will be able to

cover all services, however, and a banking consortium may be needed. This, in turn, could create

a new breed of correspondent banking. This scenario may be a blessing for banks. Getting deeply

involved in working-capital finance may reduce the total credit exposure in a supply chain, lead to

better use of banking capital and minimize risk. In an era when most banks are trying to reduce

the leverage on their balance sheet, this would be most welcome.

No more paper. Many countries have standardized electronic identification numbers and

supplemented them with digital identification and signature powers. Leading global firms such as

Johnson & Johnson already invoice electronically. This is forcing banks to rethink their service

models and offers opportunities for new services, such as the handling of accounts receivable and

payable. Transaction banking could eventually become fully electronic, with a product supply

mirrored by a financial supply chain, and with components and assemblies paid for immediately as

they move through the chain.

All of these possibilities raise interesting questions for the banking industry:

Which “ecosystems” should we back? Banks must determine whether they have the skills and the

distribution footprint to become the financial supplier of choice. They must also consider their

ability to implement the technology that will help gain true visibility in the ecosystem.

What digital real estate should we occupy? As purchase orders, invoices and payments become

fully electronic, banks must determine which service they can offer immediately, which they can

develop and who will be the likely competition. (Could Google become the next bank?) Banks

must also think through the roles of postal agencies, couriers and other logistics partners.

How should we think about credit? In the aftermath of the current financial crisis, business

practices will change drastically due to greater regulation and increased industry stoicism. Banks

will have to help companies shorten their balance sheets without lengthening their own. With

securitization markets currently frozen, this will be no easy task—but in the longer term, advanced

syndication may prove beneficial.

Supply: Where’s the Money?

Given the obvious trend toward globalization, certain banking activities will need an international

footprint. When business choices lead to presence in a certain country, cultural and managerial

challenges follow. Can banks deal with them in a cost-effective way?

Finally, banks may be forced to do some severe product pruning, especially if activity is

geographically capped. New IT tools to optimize price sensitivity may help in this exercise.

Limits of generic risk buffers: The argument for separation of banking activities is the forced break-

up of correlation. Unlike the insurance business, equity in banking is a generic risk buffer covering

all activities. But doesn’t this “genericness” increase correlation? Simply put, if the dealing room

incurs an excessive loss, the risk buffer can also be eliminated for mortgages.

The promise of Allfinanz: Combining banking and insurance was once roundly applauded because

of synergies in distribution, product development and asset or liability management. As for

Allfinanz’s long-term future, product synergies could be achieved through outsourcing and lead to

faster product development, but the benefits are limited. In assets and liabilities, real synergies

may be elusive. The size of a bank’s balance sheet is substantially greater than that of an

insurance company, and the efficient swap market is a good alternative to hedging interest-rate

risk. Again, there is limited benefit here.

Banks: Under New Management

Regulators are rethinking their monitoring practices, and this could lead to new accounting

standards, capital adequacy and even the restructuring of the entire financial system. The focus is

on several areas: limiting mark-to-market accounting practices, despite their advantages in times

of high liquidity; determining capital adequacy of credit and liquidity provisioning; and allocating

capital to different banking areas. But the focus may spread further. Regulators could demand

online and confidential access to the risk position of every supervised situation, thereby creating a

“heat map” as risk builds. They could then claim the right to limit certain risk positions.

Technology and Infrastructure

In information technology and infrastructure— covering such functions as exchanges, clearing and

settlement—improvements have yet to be made fully, so there are numerous opportunities for

cutting costs and upgrading capabilities in this area. The process of opening accounts is still

largely a manual one, and mandate management still involves extensive paperwork. It’s telling that

in countries with high penetration of broadband Internet, up to 80 percent of bank customers use

online banking. Law-making bodies can be catalysts for IT change by mandating or offering

incentives to handle bank documentation electronically. But the industry must act on other factors

to take full advantage of IT’s potential.

Killing legacy systems: In the 1970s, banks were among the first to embrace IT, but they are now

handicapped by the costs and risks of maintaining myriad legacy applications. Modernizing these

infrastructures could cut costs significantly. (It has already done so in credit card and mortgage

processing and payments).Young people, for example, prefer text messaging and online chatting;

business professionals are likely to opt for email; and older people still prefer the personal

conversation. The delivery of financial products and services should be tailored to these various

segments.

Performance: Making Profits

Most important force that will shape the banking industry in the future: performance and profit.

Additional capital requirements could dampen returns, thereby rendering the sector unattractive for

investors. The industry has to think about its long-term appeal as an employer, particularly with

regard to executive positions. Regulatory compensation capping may be unavoidable, but we think

it’s ineffective. Nonetheless, the banking industry must rethink how best to attract and develop

people with leadership abilities, particularly since many current executives may move on earlier

than planned. The industry must also face pricing changes. Credit will come at a premium,with

higher margins; and deposits may become a temporary loss leader as banks try to maintain stable

funding. As volatility increases, trading and derivatives could become tempting (albeit risky)

activities. In any case, the profit mix may shift dramatically, and banks need to figure out how to

deal with it. There’s also the question of how government intervention will affect the economy. For

example, will what some observers call out-of-control government spending spur inflation?

Ironically, such a scenario could have an upside, as house prices would likely also rise, thus

allowing homeowners to service their mortgage debt. On the other hand, differences in inflation

around the world could distort trade balances, further fueling disenchantment with protectionism.

Finally, there’s the well-publicized question of executive compensation. We believe the banking

industry sector can—indeed, must—offer compensation and incentives that will attract and retain

solid leaders. Furthermore, banking executives should be compensated on the same order of

magnitude as those with whom they deal, perhaps through long-term vesting of variable

compensation tied to long-term risk-taking. There must be this kind of equilibrium in compensation.

There is a legion of serious bankers trying to strengthen the industry. While they are trying to

restore capital and profitability, their customers are rapidly fragmenting into new, unique segments

with new needs that require capital investments. Inevitably, increased regulation will require more

investment. The banking industry must develop well-thought-out initiatives to manage both talent

and money if prosperity is to be restored. Segment specialization, IT upgrading and transforming

into leaner institutions are among the key ingredients for banks to succeed in the not-so-distant

future.

SOCIAL FORCES AFFECTING THE INDUSTRY

Demographic segmentation: Changing consumer demographics indicates vast potential for

growth in consumption both qualitatively and quantitatively, due to burgeoning affluent middle

class with the lowest average age in the world. India has more than 50% of its population below

the age of 25 and more than 65% below the age of 35. As per a survey 130 million Indians are

going to be added to working population in the coming years. Economic prosperity and the

consequent increase in purchasing power have led to a boom in consumerism. Indian consumers

are now more open to new services and products.

Increasing literacy levels and higher adaptability to technology: Due to increase in the

literacy ratio, people have developed a taste for latest technology-and variety of products and

services. It will lead to greater demand for retail activities specially retail banking activities.

Continuing Growth: Even with concerted efforts on increasing the banking penetration and

bringing more and more adult population under the formal financial system over the last 6-7 years,

more than half of the target population still remains uncovered. Of the 6 lakh plus villages in India,

only about 3.84 lakh villages had access to banking service either through a branch mode, a

banking correspondent or other channels as on March 2014. Similarly, the credit penetration from

the banking system in the country is abysmally low at about 10%. All this means that the retail

banks have a huge potential to grow in India over time. Banks should get convinced that financial

inclusion is a viable and profit-making business proposition and pursue the objective with a

missionary zeal.

TECHNOLOGICAL FORCES AFFECTING THE INDUSTRY

Countering the effects of disruptive new technologies: Banks should quickly adjust to the new

paradigm where more and more of their customers move online for accessing banking services.

As the demographic changes take place the “technology acceptors” will soon outnumber the

“technology deniers” and banks have to use this short transitory period to adequately equip

themselves to manage the disruptions arising out of this alternate delivery channel. Further, since

the internet is available on a “24 X 7” basis, the banks would have to substantially invest in

appropriate technology and ensure that their service offerings are available round the clock with

minimal downtime. The first is innovations in the payment space such as mobile money, e-wallets

and payment aggregators, which, collaborating with the exploding e-commerce segment, threaten

to take away a sizeable chunk of a bank’s cash flows and revenue streams.

For example, Mswipe has given an alternative solution to point of sale machines given by banks.

This has increased the reach of digital payment to traditionally cash-only transaction-based

services (such as barber shops,kirana stores) in a cost-effective manner.

Technology: Retail banking requires mass production techniques and the availability of

technology have enabled the banks to design appropriate technology-based delivery channels.

Marketing: In the digital era, marketing has become substantially more sophisticated. Digital

marketing is another profile which is likely to be in demand in 2015 as banks look to leverage their

social media strategies. Banks can now leverage analytics and interactive marketing. Banks can

optimize channels to create differentiated digital customer experiences.

Digital Banking: Digital Banking is the ‘paperless banking’ which eradicates the cash/ paper

based transactions leading to reduction in corruption. Digital Banking combines the befit of two

worlds: a new customer experience on the outside and an efficient, effective operating model on

the inside both enabled by digitalization.

By digitalizing processes in banks, engaging customers on digital channels for transactions and

sales, and collectively working towards eradicating cash, banks can achieve upto 30% jump in

sales productivity, reduce administrative staff by about 10-15% and improve back office staff

productivity by 20%. The digital banks have a cost to income ratio advantage of 10-15% over

conventional models. This is driven by the rate of customer acquisition that is more than twice as

productive as conventional models where the customer uses the bank as primary mode of

payments.

ECONOMIC FORCES AFFECTING THE INDUSTRY

Continuing Trend in Urbanization: Urbanization is taking place at a faster rate in India.

Population residing in urban areas in India, according to 1991 census, was 11.4%. This count

increased to 28.53% according to 2001 census, and crossing 30% as per 2011 census, standing

at 31.16%.

Economy slowdown in productive sectors: Due to economic slowdown in productive sectors,

credit demand from the basic industrial and infrastructure sectors have waned somewhat and the

regulators have been more accommodating in allowing the banks to lend liberally for consumption

purpose.

Sluggish growth of Bank Deposits: Inflation adversely affects the purchasing power,

consumption and inflation adjusted returns on assets. There has been a fall in net financial assets

of households as a percentage of GDP. Over the recent years there has been sluggish growth in

Bank deposits. The reason has been high inflation which has marred down the saving capacity of

the masses, better returns for non financial assets such as gold and real estate and the differential

tax treatment of bank deposits, capital market instruments and non-financial assets like real-

estate. With the decline in financial savings the saving investment gap has increased and this has

increased the economy’s dependence on external capital.

Declining Treasury Income of the Banks: The Treasury income of the banks, which had

strengthened the bottom lines of banks in the past few years, has been on the decline for last two

to three years. The banks are moving to alternative recourse for profitability.

Less NPA/Impaired Assets: Considering the fact that retail's share in impaired assets is far lower

than the overall bank loans and advances, retail loans have put comparatively less provisioning

burden on banks apart from diversifying their income streams.

Risk spread: The banks are risk averse in lending to corporate and hence to spread the risk,

Banks should focus on small ticket retail loans.

LEGAL FORCES AFFECTING THE INDUSTRY

Basel III Capital Requirement

Basel III guidelines attempt to enhance the ability of banks to withstand periods of economic and

financial stress by prescribing more stringent capital and liquidity requirements for them.

The new Basel III capital requirement would be a positive impact for banks as it raises the

minimum core capital stipulation, introduces counter-cyclical measures, and enhances banks’

ability to conserve core capital in the event of stress through a conservation capital buffer. The

prescribed liquidity requirements, on the other hand, would bring in uniformity in the liquidity

standards followed by the banks globally. This liquidity standard requirement, would benefit the

Indian banks manage pressure on liquidity in a stress scenario more effectively. Although

implementing Basel III will only be an evolutionary step, the impact of Basel III on the banking

sector cannot be underestimated, as it will drive significant challenges. Working out the most cost-

effective model for implementation of Basel III will be a critical issue for Indian banking.

Further, there would be a drastic impact on the weaker banks leading to their crowding out. As is

well established, as conditions deteriorate and the regulatory position gets even more intensive,

the weaker banks would definitely find it very challenging to raise the required capital and funding.

In turn, this would affect their business models apart from tilting the banking businesses in favour

of large financial institutions and thereby tilting the competition.

Impact on banks in India

Pressure on Return on Equity (RoE):

To meet the new norms, apart from government support a significant number of banks have to

raise capital from the market. This will push the interest rate up, and in turn, cost of capital will rise

while RoE will come down. To compensate the RoE loss, banks may increase their lending rates.

However, this will adversely affect the effective demand for loan and, thereby, interest income.

With effective cost of capital rising, the relative immobility displayed by Indian banks with respect

to raising fresh capital is also likely to directly affect credit off take in the long run. All these affect

the profitability of banks.

Pressure on yield on assets

On account of higher deployment of funds in liquid assets that give comparatively lower returns,

banks' yield on assets, and thereby their profit margins, may be under pressure. Further higher

deployment of more funds in liquid assets may crowd out good private sector investments and

also affect economic growth.

Higher capital requirement

The increase in the minimum capital ratio, combined with loan growth outpacing internal capital

generation in most government banks, will lead to a shortfall of capital. The CCB is designed to

ensure that banks build up capital buffers during normal times, which can be drawn down as

losses are incurred during a stressed period. The requirement of capital will be less to large

private sector banks due to their higher capital ratios and stronger profitability. The international

credit ratings agency, Fitch, estimates this figure to be at around $ 50 billion, while ICRA projects a

figure of around $ 80 billion.

Growth barrier

Growth and financial stability seem to be two conflicting goals for an economy. The Indian

economy is transforming structurally and moving towards rapid growth although some seasonal

down trends are seen. The average investment in infrastructure sector for the 12th Plan as a

whole is likely to be about 9.14 percent of the GDP. The economists' projections are that the

Indian economy will see higher growth in the manufacturing sector which enhances demand for

credit. The outstanding credit gap for the Micro Small and Medium Enterprises (MSMEs) sector is

estimated at 62 percent, which is estimated to reduce to 43 percent in March 2017 with the

assumption of minimum 20 percent year on year (Y-o-Y) credit growth to MSME sector and 10

percent Y-o-Y credit growth to medium enterprises by Scheduled Commercial Banks (SCBs).

In a structurally transforming economy like India with rapid upward mobility, credit demand will

expand faster than GDP for several reasons. What all this means is that banks need to maintain

higher capital requirements as per Basel III at a time when credit demand is going to expand

rapidly.

Difficulties with implementing Basel-III

There are worries among certain bankers that implementation of Basel-III proposals will have an

adverse impact on the return on equity and financial ratios. There are concerns that PSBs may not

be able to grow their loans since government-dependent lenders would not have adequate capital.

Critics of Basel- III norms feel that just because banks would have more capital, it does not mean

that a bank will not get into trouble. The crises may at best be postponed. Walter Bagehot, the

former editor of 'The Economist', had famously said, ‘No capital is required for a well-run bank and

no amount of capital can save a badly-run bank!’ A taskforce of leading bankers warned in

June'2012 that the Basel III rules were too focused on problems that occurred in Europe and the

US. They argued that the standards unfairly penalise trade finance and project finance, two forms

of credit that are particularly important in developing nations. This school of thought believes that

the Indian banking system has proved robust due to constant monitoring by the RBI. As per past

instance, Indian banks had carried a huge negative net-worth for three years without any problem.

As per this argument, PSBs do not need more capital. Since Basel-III is an international norm,

therefore, Indian banks, including PSBs with international presence, would find it an obstacle if

they are non-compliant. One of the solutions proposed by policymakers is to go slow on imposing

new capital adequacy norms for PSBs as all of them do not have a foreign presence. However,

the difficulty in increasing the capital of PSBs is not because of their inability to attract investors. If

investors are given confidence, banks would be able to raise sufficient capital. But the government

would have to dilute its holding in the PSBs. It seems difficult because the government may be

unwilling to let go its majority stake in these banks. If fresh equity is to be raised without diluting

the government's share, huge budget allocations are required. As per estimates, about INR

60000-75000 crore demands for capital from banks could be there in the next five years. Again, it

may not be easy for the government, considering its fiscal deficit.

The government may have to work on two options. One is to ask PSBs to keep their loan portfolios

at current levels or even shrink them. But it would be a retrograde step and will affect the funds

available to industry adversely. The other is to accept a dilution of its stake, may be up to 26

percent. After declaring in the Parliament that every company -private or government, should have

a minimum of 25 percent float, the proposal was diluted when the investment banking circles said

it would be impossible for the government to meet its disinvestment target. Their implementation of

capital norms are seen as unwelcomed move not only in India but are opposed by most bankers

across the world. While capital is just one of the focus items, the bigger worry for Indian banks

could come from the treatment of their pension liabilities. This liability is still to an extent not been

quantified. With its focus on the quality of the capital after the financial crises, RBI has proposed

full recognition of liabilities from defined benefit pension funds in the calculation of CET1 to ensure

it is able to absorb losses. This also eliminates the risk of this being used to protect depositors and

other creditors.

BUSINESS STRATEGIES OF THE MAJOR COMPETITORS

Low- Cost Leader- SBI, the country’s biggest lender is a corporate colossus, with 215,000 staff,

16,000 employees and almost 25 per cent of Indian banking system assets.

SBI's strategy has always been to offer the lowest rates in the market, which is then followed by

competition.

In the recent new also it was stated that State Bank of India (SBI), India's largest bank by assets,

may reduce its base rate once again to take the competition head on. SBI has built a good chunk

of its portfolio by taking over corporate and retail loans from other banks (refinance).

The State Bank of India has initiated a three-pronged strategy to push its home loan business. SBI

sells its home loan products through the entire group network instead of limiting it to the bank,

develop a mechanism to identify right customers for home loans, and implement a uniform delivery

system across its branches. The bank has put in place an operational plan to focus on non-

performing assets (NPAs) and is also hiring turnaround specialists to monitor restructured loans to

avoid any slippages. SBI has created review teams for stressed loans for each region.

To monitor stressed or restructured loans, the bank is engaging turnaround specialists like global

professional services firm Alvarez & Marsal. Banks hire these specialists to help the companies

under stress to improve their cash flows, cut costs or increase market share. Banking industry

observers say hiring external experts is a good strategy as SBI does not have the expertise and

the resources to monitor stressed accounts spread across sectors and regions.BCG is its

management consulting partner.

Defenders: PNB and BOB

The public sector banks have largely been followers because of the conservative approach being

publicly managed.

Bank of Baroda is an Indian state-owned banking and financial services company headquartered

in Vadodara(earlier known as Baroda) in Gujarat, India. It is the second-largest bank in India,

after State Bank of India. Based on 2014 data, it is ranked 801 on Forbes Global 2000 list.[2][3] BoB

has total assets in excess of 3.58 trillion, a network of 5089 branches in India and abroad, and

over 6900 ATMs.

Bank of Baroda provides commercial banking services. The bank operates in wholesale banking,

retail banking, rural and agricultural banking, wealth management, mobile and Internet banking. Its

offerings include deposits, commercial and institutional credit, project finance, treasury, forex,

investment and risk management and other related financial services. The bank operates through

four segments: Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking

Operations. The Treasury segment engages in bank's domestic treasury operations and covers

activities in various markets, which include foreign exchange, interest rates, fixed income,

derivatives, equity and other alternative asset classes. The Corporate/Wholesale Banking

segment offers an array of loan products and services, which include term, short-term and

demand loans, working capital facilities, trade finance products, bridge, syndicated, infrastructure

and foreign currency loans, loan against future rent receivables and many more to its large and

mid corporate clients depending upon their needs. The Retail Banking segment products include

home, auto, education, traders and mortgage loans. The Other Banking Operations segment

includes other banking operations and nonbanking operations. Bank of Baroda was founded by

Sayajirao Gaekwad III on July 20, 1908 and is headquartered in Vadodara, India.

Analyzer:

Canara Bank during 2013-14, expanded its network by adding 1027 branches and 2786 ATMs,

taking the number of branches to 4755 and ATMs to 6312 as at March 2014. Canara bank is

relatively much smaller than SBI, BOB and PNB. It’s strategy had been usually to capitalize on the

best of the market leader strategies. For example it’s only in 2013 that it took over many online

initiatives

Prospectors: The private banks have been leaders in technology adoption and digital marketing

initiatives. HDFC and ICICI have been the leaders in this field. First m-banking initiatives in Indian

banking are also initiated by private banks.

Aggressive Marketer, First In technology Adoption: HDFC bagged a lot of technology initiative

awards. HDFC also has the largest presence on social media with 1.5 Mn Face book fan

threshold. HDFC Bank is the leading bank on social media with a score of 110 followed by ICICI

bank with a score of 108 and Axis Bank with a score of 93. The bank is nimble-footed enough to

change its loan mix in different scenarios. It is a market leader in housing loan segment. HDFC

Bank, with $86 billion in assets and a mere 0.25 NPL ratio, has India’s highest credit risk and loan

underwriting metrics. Modinomics benefits the bank since it has scaled up its branch network to

3400.

The private players are more aggressive in marketing in technology initiatives. HDFC and ICICI

the market leaders among private banks are forerunners in marketing and technology initiatives in

Indian banking industry. The private players have better social media presence with ICICI (2 Mn)

and Axis ban k(1 Mn) trailing HDFC, than public sector banks. Only IDBI bank, out of the 26 public

sector banks has its presence on twitter and YouTube apart from Facebook.

Largest private sector lender ICICI Bank in collaboration with Tech Mahindra launched a payment

service 'Tap-n-Pay' based on the near-field communications (NFC) technology, enabling

customers make over-the-counter payments without using cash.

It can be used for merchant payments by merely tapping a NFC-enabled mobile phone or a tag on

the counter. ICICI Bank is focusing on harnessing technology for integrating diverse products by

unifying the enterprise IT architecture.

In ICICI Bank, the cost to income ratio has declined by around 45% to 35%. They are promoting

tablet banking to improve customer services by facilitating their sales team with tablets which has

further enhanced their productivity. Further amongst Public sector banks, Union Bank and SBI

have launched tablet banking so far.

The Company was amongst the early entrants in India to an online application for customers to

trade while on the move. This widely used application won the Company the Mobbys award for the

‘Best Mobile application in Mobile Trading’. ICICIdirect.com won the award for Innovation at

Banking Frontiers Finnoviti Awards 2013. The Company won the Outlook Smart use Technology

eRetailer of the year 2013 conferred by FIHL in association with HomeShop18.com. The Company

also won the Innovation Award for Oracle Fusion Middleware. The Company has consistently

demonstrated the best usage of Oracle Tuxedo as an OLTP engine. These Asia-Pacific awards

honour Oracle customers for their optimum and innovative solutions using Oracle Fusion

Middleware.

SWOT ANALYSIS OF THE ORGANISATION

Strength Weaknesses

• Fundamentally sound bank

• Predominant presence in less

• 3.7 crore strong customer base

• Well-entrenched Brand Image

• Dominant position in Indo-Gangetic

Plain –No competition

• A leader amongst Public Sector Banks

• High proportion of customer base in

deposits

• Strong Risk Management Practices

• Redefined processes through

technology initiatives like CBS, ATM,

Internet Banking

• 100% CBS branches

• High tech platform incorporating

EDW, CRM etc.

• Large network of branches with 66%

in Rural & Semi-urban areas

developed areas leading to high

operating cost

• Complacency (Structural &

Environmental)

• Weak & Inconsistent MIS rendering

decision making difficult

• Limited International presence. Low

NRI business

• More dependence on conventional low

margin business

• No Income from Financial Products

such as Insurance, Mutual Fund,

Credit Card etc.

• “State” Ownership has affected level

playing field and competitive ability

• Less flexibility in dealing with strategic

HR & operational issues

• Imbalance in distribution/ deployment

of staff

• Inadequate skills for modern banking

• Changing environment, adoption of

technological advancement, marketing

of products requires change in the

mind-set of employees

• Low per employee productivity

Threats Opportunities

• Aggressive marketing by competitor

banks

• Expansion of peer Banks/Private

Sector Banks in Indo-Gangetic belt

eroding our dominance

• Loss of savings business to Mutual

Fund/ Insurance Products which are

aggressively marketed as being more

• Rural India is the next growth horizon

with an opportunity 3 times the size of

Urban India

• Financial Inclusion is a clear-cut

opportunity with overall exposure to

formal services of finance being about

20%

• Great opportunity for expanding

remunerative

• Technological parity of competitor

banks

• Aggressive strategy and innovative

products, larger risk appetite of other

banks

business with over 60% population

outside the banking service net

• IT Initiative creating a back bone for

increasing reach. It provides an

opportunity to go beyond the Brick &

Mortar

• Bank has a visionary leadership which

can transform the bank

• Large workforce of 55398 number of

employees. Each and every employee

has to believe we can do it, usher in

change in our attitudes/conventional

wisdom, be a learner willing to adapt

to the changing banking environment

STRATEGIC ALTERNATIVES AVAILABLE FOR THE ORGANIZATION ANDTHEIR

IMPLEMENTATION

Leveraging IT Initiatives

IT initiatives by Banks are likely to gain momentum with more and more banks going for anywhere,

everywhere and anytime banking. Banks are likely to expand ATM network, both off-site/onsite on

standalone/shared basis. Banks would provide more value added services besides exploring

alternate delivery channels for reducing their cost of transactions. Internet Banking is likely to

spread. Various IT initiatives would require secured gateways providing security for transactions.

Banks would also be facilitating all customer payments like utility bills, insurance premia, tax

payments, investments in bonds/equities etc. Mobile banking will take off in the banking sector

rapidly and will open new avenues for personal and merchant transactions. PNB can also

capitalize on this opportunity.

Priority Sector

Bank can turn this segment into a commercially viable sector focusing on the growing areas of

food processing, dairy products, poultry, the new areas of horticulture & floriculture and looking at

innovative methods of financing through the big mills with success met with the sugar mill for

financing sugarcane farmers.

Growth can be achieved through financing agro based industries, MFIs, development agencies

and supply chains of the big mills.

Focus can also be on financing to the disadvantaged section of the society under financial

inclusion.

Banks’ approach to the rural lending can be guided mainly by commercial considerations in future.

Rural financial arm of the bank will have to enlarge their functions and range of services offered so

as to emerge as "one stop destination for all types of credit requirements in rural and semi-urban

centres”.

With the greater disintermediation by large corporate for sourcing their funds, banks would need to

focus more on the SMEs and become partner in their growth.

Efforts can be towards enhancing loans under Tie-up arrangements with Sugar Mills, Dal Mills,

Rice Mills, Tractor and Agricultural implements manufacturers while focusing on Intensive

Campaigns for issuing fresh KCCs, diversified financing for activities, such as, fisheries, poultry,

dairy, bee-keeping, etc.

Financing to food and agri-processing units particularly in rural areas can also be a thrust area

including dairy and agro processing sector while utilising BCs/BFs to cover a vast segment of

Small/Marginal Farmers, Agricultural Labourers, Sharecroppers & Oral Lessees by the rural/semi-

urban branches.

Financial Inclusion

The relatively under bank/unbanked rural segment offers great opportunity to the banking sector,

especially in the Indo-Gangetic belt where PNB has a dominant presence. In order to effectively

leverage this opportunity, bank would need to realign the business and operating model. In this

context, the bank will have to understand the needs of rural consumers and use marketing to

improve financial literacy. New Design organizational models will have to be created that would

foster collaboration with other players. The concept of business facilitators/business

correspondents will have to be implemented and used.

To reach the unbanked and under banked areas and to expand their presence, we propose the

bank to have a Brick & Mortar model, financial Inclusion – BC/BF Models and a Kiosk Model which

will be technology driven. The bank aims to increase customer touch Points to 100000 by 2016.

The Indian Diaspora

Indian Diaspora constitute of Non Resident Indians (NRIs) as also the Persons of Indian Origin

(PIOs). The Indian Diaspora today stands at around 30 million spread over 130 countries and is

estimated to produce an economic output of about US$ 400 billion. They are estimated to

generate an annual income of around 30% of India’s GDP.

Almost all Non Resident Indians remit funds to India for family maintenance and investment in

landed property/shares/bank deposits. In 2007-08, India received $42.6 billion by way of

remittances (private transfers in the balance of payment), up by 47% over the previous year’s

levels. In fact the tempo has been maintained despite the deepening financial crisis in the US and

Europe. The personal remittances segment is expected to grow at a faster pace as the US

currency is at a high and is expected to remain so in the short term. India continues to retain its

position as the leading recipient of remittances in the world.

Therefore, an important aspect of diasporic policy should be to tap their capital and establish long

term partnership with Indian domestic entrepreneurs. Appreciating the role of Non Resident

Indians in the economic development of the country, the Government has progressively

announced various schemes to facilitate investment by Non Resident Indians. The challenge is to

effectively channel the impressive remittances flows for the socio-economic development of the

country.

Creation of synergy between Domestic and Overseas Operation

The liberalization and globalization has paved the way for Indian corporate for raising cheap funds

overseas for domestic operations and for setting up of global ventures. The acquisition of

companies and joint ventures overseas along with tie up and franchisee agreements have become

the order of the day.

As a strategy PNB’s overseas offices can focus on identifying such corporate and arrange for loan

syndication/ FCCB and market for the accounts of the overseas units of the domestic corporate.

The overseas branches will be a one stop solution for their credit requirement, remittance and

correspondent banking solution.

PNB can aim to target the accounts of the employees of the overseas units of the Indian corporate

and target for the third country businesses and expansion projects of the overseas ventures for

enhancement of business.

Marketing Desk can be set up at IBD with FOCUS on Liaising with key branches for identifying

potential Indian companies with overseas presence, pursuing with Correspondents for trade

/money market lines, taking up with domestic banks for placement of short term foreign funds with

their overseas offices, liaisoning with local banks to market the buyers credit requirements of their

clients, marketing for business of domestic clients having overseas operations and marketing of

deposit placements in overseas offices from banks in underdeveloped countries.

NRI business can be enhanced by creation of NRI cells in more centres by increasing inward

remittances by tie up with more exchange houses/increasing volumes with existing exchange

houses, introduction of white labelled remittance products with back up of prominent banks,

development of a cash based, web based remittance product and having a strong centralized NRI

service centre/help desk.

Centralized Trade Finance branch can be strengthened by offering trade Documentation services

to banks in countries with good trade flows and finance where feasible.

Visibility of overseas offices can be created by developing correspondent banking relationship with

countries having substantial trade flows with India, providing inputs to various financial magazines

and by sending guest speakers to overseas conferences.

Retail Lending

The existing thrust on retail lending is likely to continue. There could be a convergence of all retail

lending schemes, giving more flexibility to the customers. Retail lending is likely to form a sizeable

part of the overall lending portfolio of banks. However, banks will also develop IT enabled system

for tracking early warning signals of NPA in retail lending.

In the Housing sector, with increasing population, urbanisation and disposable income, there

would be great demand for fresh housing. The 11th Plan also proposes large spend on the housing

sector. Bank can tie-up with builders of repute to offer loans to customers.

Special focus can be on Education Loans. There is a need to tie-up with Educational institutions

offering professional degrees to fund students and in turn build a long-lasting relationship with the

future generation. The process of globalization & integration of world economies has brought in

new opportunities in Higher Education in India and abroad. Hence there has been a surge in

education loans in recent years.

New Products & Services

Leveraging technological initiatives, 100% CBS environment in the Bank, FOREX – TREASURY

integration, Operationalization of centralized back end activities etc, a focus is now required

towards development of customer oriented new products & services (like recently introduced Cash

Management Services, Global Credit Card, Depository & Custodial Services and MIBOR Linked

Notice Deposit Scheme) by various owner Divisions and updation of existing retail products on an

ongoing basis. With the aim to achieve total customer satisfaction as well as to enlarge reach

Towards this direction, branches can be identified in high activity locales and Dressed up as

“Boutique Branches” especially catering to High Value Customers providing ambience and all

modern facilities like Internet, Cyber Café, telecom facilities, etc. with global standards which are

available in private and foreign banks. For Young India, educative paid up services can be

provided. The penetration in the rural areas can be through financial inclusion while in the urban

areas it can be by expanding ATM network, ensuring instant money.

For building up the Customer Trust educative classes for staff members could be conducted to

teach basic business etiquettes.

There could be continuous market research and analysis of the Banking products of various other

Financial Institutions and the feedback from the customers, both existing as well as potential, for

catering to their requirements, with a pro-active attitude.

Marketing Initiatives

Presently the Lack of focus on marketing is affecting business development. Bank is mostly

banking on only “walk-in” business. Banks are likely to see greater customer centricity. Cross-

selling amongst existing products is fairly low with not many liability product holders also holder of

asset products of the same bank.

Mobilizing deposits, especially low cost deposits could become very aggressive with diminishing

walk-in customers and increasingly bank’s soliciting customers. With banks providing a wide range

of financial services, there could be cannibalization of bank deposits, with customers moving from

pure deposits products to other products like Mutual Funds, Insurance, etc. thus putting greater

strain on mobilizing deposits. There could be a change in the transaction/classical banking to

Relationship Banking with a strong customer-centric focus.

Human Resources

Bank staff is to be re-skilled and skills to be upgraded continuously through training and the banks

may have to re-look at the existing training modules and effect necessary changes, wherever

required.

Human Resource Management shall play the role as Support Division for manpower

requirements, re-designing human resource and up gradation of skills and knowledge to leverage

technology.

Focus could be on skill up gradation in employees to enable them to shoulder diverse

responsibilities of the present and future. The ambitious aspirations would need identification of

dynamic employees, who could be suitably groomed for meeting the above strategies.

Customer Segmentation

Banking is also likely to witness a decline in brand loyalty and customer switching to banks who

are better providers of services. More than customer acquisition, customer retention will pose a

great challenge. Banks will have to quickly adapt to these changes through customer

segmentation. Relationship banking and quality and speed of services rendered will determine the

survival. Banking increasingly would be done outside the branches and geographical location of a

branch would cease to matter.

Banking has to have hybrid structure, hybrid delivery channels for different customer segments,

i.e. a combination of traditional/ conventional products to wide range sophisticated financial

products suiting different customer segments.

In conclusion,

The strategies mentioned represent broad direction and the thrust areas, require further detailing

which should be converted as action steps and closely monitored regularly. The quantitative

dimensions similarly would need to be converted into targets and monitored on an annual, half

yearly, quarterly basis so as to ensure the targets are met.

Designing of clear-cut and comprehensive corporate policy covering strengths and limitations with

regard to retail banking is the immediate need of Banks. Banks must build awareness amongst

staff in retail banking centres. Proper assessment of ever-increasing customers' expectations is

very important. Innovate and respond to the changing needs of customers in terms of new

products and services needs to be looked into. Hence identification of retail segments, maintaining

range of products and services for diverse needs of customers, strengthening bank's staff

competence in handling products and services is must. Optimal utilization of the available

technology is the need of the hour.

Banks need to utilize existing data-base and building ability to 'cross sell' to increase fee based

income of the bank. Apart from this the technology can also be used to build marketing thrust and

capturing 'walk-in businesses' effectively.

With similar products offered by the banks, service is the only differentiator which makes the

difference. In such scenario, service quality and Customer Relationship Management needs

special attention to create moment-of-truth for the customer. This will enable the banks to enhance

the customer loyalty towards them. The banks should adorn the image of 'most customers friendly'

bank by simplifying the banking for them.

Though there are multiple e-delivery channels in the banks, yet the branch banking is important

since it creates the personal touch with the customers. However with the changing demands of the

Customers, the branches should be transformed from the traditional branches to sales-touch point.

The branch personnel should focus on marketing and cross-selling activities and routine task such

as account opening/loan processing can be done at the back office level/centralized hubs. There

is Need for 'systematic approach' which is a pre-condition for successful retail banking. In today's

life 'Innovation is necessity, not option'. Hence the banks must continue to innovate in terms of

products & services to cater to the needs of the vast segment of the society. To innovate,

understanding the changing customer/market needs is fundamental. Banks must function

efficiently as service providers.

Retail banking is moving from class banking to mass banking in a competitive scenario. Customer

satisfaction requires innovations to facilitate banking. Banks are moving to rule based lending and

facilitating click banking rather than brick banking.

Ongoing training for empowering the staff to market the products along with external marketing to

attract the customer by raising his expectations is the need of the hour in banking. Often staff is of

the view that marketing is the job of marketing department. There is an urgency to signal that each

staff has to be a marketing agent. Staff must have complete knowledge about products & services

and should promote them.

Internet Banking, Mobile Banking and making ATMs more customers friendly is the need of the

hour to promote retail deposits. Deposit products are dependent on the technological services

extended by the Bank. Greater is the efficiency the scope for their growth is better.

Growing affluence of agriculture sector needs to be closely watched and potential for banks retail

products is growing among the neo-class of agriculturists. Continuous innovation in financial

inclusion shall play an important role in the retail banking in rural areas of India.

Focus on customer centricity, product innovation, quick delivery, better customer relationship,

formation of marketing teams, leveraging from technology, identification of emerging markets in

rural India are the developments that retail banking needs to look into to sustain the profitability of

the banks.

Recent measures such as the re-introduction of inflation indexed bonds (IIBs) and introduction of

CPI linked saving certificates for retail customers are part of the strategy to encourage investors to

invest in financial assets.

ALTERNATIVES TO BE PURSUED AND REASONS FOR PURSUING THEM

Deployments of big IT systems:

Decentralisation of decision making: Bank should improve its information transfer and approval

process. Currently all banks branches have to contact the officials in their head offices before

approving clients. Decentralization on behalf of the bank would solve this problem. To fasten the

process of decision making and ascertain better customer service in these times of fierce

competition decentralisation is a strategic choice shall be made by PNB.

Enchasing on Brand Equity: As the firm has a well established reputation in Northern India, this

shall be used to expand not only in rest of the country but in European and other emerging

markets of the world.

Disinvestment: The bank shall disinvest and offer fresh shares for sale to raise capital in view of

the GOI’s decision to reduce fund injection in the banking system.

Implementation of BASEL III earlier than competitors: Strong Capital management practices of the

firm can help it implement BASEL III norms earlier than in its competitors helping in international

expansion and global presence. This could get the firm early mover advantage.

Strategic Alliances: For expansion in new markets, the knowhow of the strategic partnering

consultant BCG can be put to use to find the right targets and culturally fit organisations for

mergers or acquisitions. As the organisation has huge financial resources the merger and

acquisition could be a good option to expand in new markets. For financial evaluation of the same

collaboration with other strategic partners like JP Morgan or KPMG is suggested.

Corporate excellence through mergers and acquisitions: To attain size-benefits, PNB, should look

for a marriageable bride for myriad of synergies leading to sustainable competitive advantages.

To continue focus on cash management service: With more and more banks preferring to

outsource their collection and payment, fee based activity is growing. Given the vast geographical

presence of PNB that can be leveraged upon, the bank is better placed to offer these services at a

competitive rate as compared to foreign banks.

To continue targeting SME segment: The foreign banks have also started targeting this segment.

As such leveraging on the expertise of the experienced personnel of the bank it should try to move

faster than competition and make use of the first move.

Should focus on FX services: FX service is an area that is being concentrated upon only by very

few banks. With Indian industries looking for a global presence, the need for this product is likely

to grow. PNB should target this product and try to make attractive offerings to the clients in the

sector.

Should provide advisory services via specialists: The bank should appoint specialists in certain

industrial sectors who would not only evaluate projects for the bank but would also give advisory

services to the clients.

Single point interface: One of the complaints that clients usually have against public sector banks

is that, the company has to deal with multiple managers depending upon the products that the

company needs. That is, for cash management services there is one relationship manager, while

treasury has another. The companies find this highly disconcerting and prefer to deal with a single

individual from a bank, which could in turn interact with his colleagues.

Flexibility and personalization of services: Companies prefer sticking on to the private sector

banks because of the rigidity and impersonal touch with the public sector banks. PNB should

provide personalized service too.

Effective use of social media: The Bank should launch publicity campaigns for its new products

and services and use effectively all channels of communication including advertising, social media

and marketing collaterals to enhance its brand image. The bank shall try to increase it’s social

media presence.

The well established network of branches shall be intelligently used for distribution of new

innovative products to tap in those markets. As the government of India is focusing on agriculture

and MSME this could push the rural incomes. The bank shall tap on this opportunity by introducing

new innovative products to tap on the potential of the areas where it already has a presence.

In UK, the Pay M service launched by the payments council allows for instantaneous transfer of

funds from one account to another purely on the basis of mobile number. This is facilitated by

central registry where mobile numbers are linked to specific bank accounts. It is proposed that all

banks in UK will participate in the system. The response to PayM has been extraordinary, with

over one million customers signing up within three months of its launch.

PNB should also launch the service similar to the PayM facility of UK. This mobile-to-mobile

payment mechanism has an advantage of the instant mode of payment and is highly convenient to

the customers even in the far flung areas.

The bank should launch an online remittance product after obtaining regulatory approval for the

same. Existing Maestro debit cards shall be replaced with a new contactless MasterCard debit

cards. Cash ISA scheme shall be popularised. Pension schemes for employees under auto

enrolment scheme shall be implemented. To expand in European markets, the bank shall explore

the possibility of establishing an office in one of the European countries.

CONTROLLING THE ALTERNATIVES

Security breaches can damage reputations and destroy trust, bank should invest heavily in cyber

security programmes equipped with predictive analytic solutions and reactive readiness. When

any big IT system is implemented banks are exposed to three types of risks e.g.

1. Technology Risk,

2. Business Risk and

3. Organisational Risk.

Business risk attempts to determine the odds that the new system will fail to deliver productivity

and financial benefits that are worth more than the cost to achieve them. Bank managements

should make a beginning and try to work out some strategy and implement some frame work /

methodology in order to measure business value of IT.

Organisational risk is a term that attempts to quantify the possibility that users would not exploit

the full potential of the new system. While implementing the big IT systems constant evaluation of

the environment must be done to find the relevance of the investment as IT have the most risk of

fast obsolesce. Also IT infrastructure must be accompanied with Business process reengineering

and a robust and continuing training to end users who will lead to a complete ownership of the

system at user level.

Though in the present times decentralization could be a good opportunity, it should be controlled

by effective and experienced management. Also continues vigilance is a necessity. As the

organization is already facing the issue of generation gap in the workforce, attitude training shall

be accompanied with decentralization.

Though MSME could be viable opportunity for the firm to stretch its loan portfolio, stringent

measures to evaluate the creditability of the borrowers as many of them could be first time

customers to the bank shall be done. Collaboration with credit rating agencies can possibly be a

good strategy and hence outsourcing the evaluation of creditability of borrowers.

The disinvestment should be timed correctly to tap the maximum positive sentiment and buying

spree in the markets.

Though the firm shall target implementing BASEL III norms earlier than the competition , it should

be done in a phased out manner to avoid undue risky practices and loss of opportunity pertaining

to blocked funds for liquidity requirements of BASEL III implementation.

Mergers and acquisition shall be done through a well-crafted strategy to generate synergistic

advantages for the merged entity. Expert consultation in the field as from KPMG must be sort to

achieve the same.

Given the economic environment, Bank shall target cautious and controlled growth, particularly in

new lending activities; and the Bank shall continue to focus and enhance its credit risk framework

to make it more robust. Risk rating modules shall be updated based on past experience. Well

capitalised, highly liquid and diverse balance sheet and disciplined growth shall be the core

objectives.

FUTURE PROSPECTS OF THE ORGANIZATION

Investment in delivery channels, IT infrastructure, customer service, and business process

reengineering, innovative products / services and staff knowledge. Offshore expansions in

consultation with strategic experts as partners.

Expansion of asset base to a well diversified productive segments of the economy like Agriculture

and Micro, Small and Medium Enterprises (MSMEs), Retail, including Housing, Education, Vehicle

and others, exposure to Corporate and various Infrastructure segments.