Article on Indian Banking Sector- “Survival is the mother of innovation”

“Banks can provide innovation products and services to their corporate and retail customers only when creative people are in place along with latest technology. Such people might provide innovative ideas to customers and banks. By converting there acceptable ideas into reality, banks can get an edge to compete effectively in the global village. Indian banking is also changing its shape rapidly by adopting innovative technology, products and services.”

Innovation is the key to success for any activity. Innovation banking is therefore not an exception. Innovation banking is possible only when we have innovative people in banking. Moreover, innovative ideas of such people have to be heard at the right time by the right people. Only then the needed encouragement and support is given to convert such innovative ideas in reality.

In the past, a generation gap is considered to be with a span of at least 10 years. Whereas with the improvement in the technology followed by integration of people and places across the world on account of revolutionary changes in information and communication. The entire world has become virtually a small global village. Since all organizations and people use technologies, we find that a new generation of techno savvy people emerging in a very short span of 5 years in every sphere of activity infusing dynamism and creativity leading to several innovations.

Globally, usage of technology is very extensive in the financial sector of which banking sector is an integral part. Indian financial sector has made rapid strides in late 1980s and early 1990s picking up momentum with the advent of 21st century. Liberalization of the Indian economy has provided scope to the banking sector to reorient its focus by shifting from developmental role obligated mostly by socio-political considerations into professional financial agencies keen on preserving their bottom lines. The direction in which the Indian banking is moving presently indicates that the prevailing competition will lead to consolidation and convergence. Small players will either have to forge a merger to become big players or else they will be either extinguished or swallowed by larger players in the years to come. The pressure will equally be more on the existing large players to retain their lead over others. This emerging scenario warrants innovative approach by banks to keep themselves sailing in the sea of competition.

No wonder we find a very interesting trend in the recent past in the Indian banking. The trend is the major shift from routine banking functions to a very aggressive financial marketing organization. We find most of the routines banking jobs are out source, thanks to automation made possible by technology. Direct selling agents are actively engaged by most of the foreign and new generation private sector banks for marketing all the banking products with specified targets. Therefore, the real core people who will be retained by these banks in the long run under there direct pay roles will only be experts at senior levels in marketing, corporate and retail banking specialists along with risk management professionals who will be required in view of the impending implementation of the Basle-II norms which attaches significant to assessment and management of risk factors in banking activity.

One can visualize the following scenario in Indian banking in the next five to seven years. State bank of India and there associate banks aiming to come under one umbrella on one side followed by mergers and acquisitions taking place between few strong nationalized banks, foreign banks and new private banks on the other side. This will leave the small players and weak banks to become extinct unless they device quick strategies to become larger and stronger. In this context, innovation plays a very key and crucial role of the survival of the small players and also for the large players to retain their leadership amidst cutthroat competition. Out of the box thinking is required and such thinking needs to be nurtured by the top management.

ATMs of the larger banks are either fully out sourced by the individual banks or handed over to an autonomous agency by most of the banks collectively. Small players in ATMs are also trying to be a part of this shared network with regard to clearing operations, Reserve Bank of India has already initiated the required steps to gradually dispense with the physical presentation of chques and replace the same with electronic clearing in major cities. Similarly the audit and inspection of the computerized branches is now being done in many cases by transfer of data files to the supervisory and inspecting authorities. Qualitative inspection and supervision of the banks by Reserve Bank of India is made possible by the technology, leaving the routine audit work to the concerned internal audit departments of the individual banks.

With the automation of the routine work process and rapid technological developments, a host of customer friendly banking products with flexibility are now available to one and all. Few departments of the government (e.g. customs, income tax, central excise, commercial taxes and sales tax) have already initiated the process of EDI (Electronic Data Interface) there by reducing the manual tasks in the preparation of documentation and enhancing the levels of automation. This also facilitates standardization in documentation with uniformity. This will also ensure submission of such standard data in electronic form and scanning the physical documents where required. In the long run, this enables e-commerce to gain momentum. Therefore, banks can also equally look forward to submission of commercial documents by the trade industry through EDI in the near future. Once this is done, the need for the business segment to personally visit the bank branches to submit the documents will be eliminated. When ATMs on one side have reduce the depends of individuals customers on the bank branches to conduct their routine banking operations, the EDI when gains momentum will reduce the dependence of corporate customers on the bank branches in a similar fashion. These developments taking place mainly on account of automation will reduce the differentiation in the service delivery systems, as they are mostly standardized. Therefore, banks have to be innovative to maintain their brand values.

Few banks have already started marketing aggressively for retail business loans by tying up with a select-reputed builders and conducting road shows in India and abroad to lure the salaried people and professionals. This role is intermediation of the banker between the builders and salaried people and professionals can be further extended to cover other areas as well. For example banks can connect the manufacturers of goods and services with the ultimate buyers. The process is very simple. Banks are required to have a common agency with which the entire database of all the banks should be shared. This data should be analyzed and classified into various segments say- according to activity, age, place, income, education, etc., of the organizations and people who constitute this data. When this process is done on all India bases, a wealth of information will be available, which can be used as a marketing tool. Few relaxations in the existing banking laws are required for this purpose. Banks can also play an active intermediary role in connecting the organizations and people at various segments, thereby facilitating the process of movement of goods and services from the manufacturers/producers to the ultimate users (of course through other intermediaries where they are not dispensable). Banks can finance the manufacturers/producers or the ultimate users while tying up them with one another thereby increasing their lending portfolio and in the process ensuring the end use of funds. Collection of data from rural places is one area where banks can boast of possessing rich information, especially the public sector banks that have almost more then one third of the network of branches located at rural areas.

Banks can play a dynamic role in the delivery and purchase of consumer durables to the rural sector by using their rural database. Therefore, instead of acting as financing intermediaries to some of the parties in the total chain as at present, banks can bring all the parties in the chain under their ambit. Banks can thus transform themselves into aggressive marketing intermediaries from mere financial intermediaries. This innovative approach can also be used with regard to NPAs where the products manufactured by such sick or loss-making units are of good quality but the units have become sick due to financial indiscipline or mismanagement or lack of marketing skills. Buyers for such products can be scouted by the banks by using the above mentioned database and in deserving cases buyers can be given bank finance or there own merits to buy the products of sick units. A portion of the funds thus given can be again routed back into the banks for their working capital requirements. Similarly, banks can play an active marketing role in venture capital financing with the above modus operandi, thereby taking part in not only financing the venture capital but also in marketing functions.

Micro finance is yet another area where banks can play an active role .The objective of micro finance is to deliver a wide range of financial services say, deposits, advances, insurance and other related products to people engaged in agriculture, small enterprises and poor people in order to increase their standard of living. Finance is extended to SHGs or NGOs, which is basically institutional/group finance instead of lending to individual beneficiaries unlike in the case of other priority sector/rural lending. Moreover, there are no subsidies or interest concession and the basic concept in micro finance is to give a timely finance to the needy people. Therefore, transaction costs are cheaper and profitability is better under micro finance when compared to the conventional rural lending. In view of these factors in the long run micro finance is likely to replace the conventional and concessional rural lending. Ample scope is available for private and foreign banks to venture into this activity due to the above-mentioned advantages. Similarly, banks in rural sector should actively market products like Kisan Credit Cards, Forward, Futures, and Option markets of commodities. While Kisan Credit Cards serve as an instrument of credit, Forward, Futures and Options markets ensure a fair price to the farmers eliminating uncertainty. However, this require an effective network that is one regulated as well as a matured financial market in rural areas for the growth and development of these products. Rural India and its economy mainly depend upon Monsoons. Famine and Floods both occur at the same time in the different parts of the country causing damage to the crops. Therefore, rural insurance has to be an effective tool in hedging these risk factors. Government, banks and insurance have to together evolve a more proactive and vibrant measures to deal with this issue, both at macro and micro level. There is a vast untapped potential in this area and lot of scope for developing new and innovative insurance linked financial products.

Merger of developmental financial institutions like ICICI and IDBI with there commercial banking wings lays emphasis on universal banking offering wide range of financial products under one umbrella. Similarly, SIDBI and NABARD are having a strategic alliance with few commercial banks to expand the reach of their products and services. Banks have come to realize that it is the survival of the fittest in the competitive environment. Therefore, when necessity is the mother of invention, survival is the mother of innovation.

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