Monday July 7, 01:15 AM
Column Changing stakes
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By Vishwavir Ahuja
The first phase of banking reforms through the nineteen nineties led to the creation of universal banks in India as banks took up term financing and some of the term finance institutions transformed themselves into mammoth but agile retail banks. Capacity to raise capital, growth in deposits, innovative technology, process reengineering and better HR management internally and macroeconomic conditions externally produced many consistent success stories. Also helpful to the bottom-line of these banks was the opportunity to retail insurance, mutual funds and depository products through their vast network of branches. With the HDFC Bank-Times Bank merger, positive trends of consolidation have began to emerge. The CBOP-HDFC merger may just be another episode in this saga gathering momentum. One can argue that the Indian economy will only face a temporary halt owing to the current combination of high commodity prices, inflation and rising interest rates, but the going will continue to be good as the growth story continues. However, the purpose here is not to analyze or predict how the banking sector will fare in an uncertain macroeconomic scenario. Rather, the attempt is to look beyond and think about whether the universal banking model will continue or give way to a more differentiated market with certain large conglomerates working through subsidiaries and step-down subsidiaries (trends to that are already in sight) and certain smaller banks emerging to fulfill special needs of the high end or low-end of an expanded economy. Product differentiation is already visible as banks are moving from offering generic, plain-vanilla credit and deposit products to aggressively pegging retail, wealth management, investment banking, derivatives and cash management products to a rapidly changing and better differentiated clientele. Many of these products have been brought into India by the foreign banks, which have already tried and tested these products in other locations. However, with greater maturity in banking, products innovation is beginning to happen around local conditions. The two ends of this spectrum can be fairly represented by products in the microfinance categories and products designed for multinational corporations to facilitate cross border transactions within the regulatory framework defined under FEMA. Another factor that will lead product innovation is financial disintermediation. With greater capacity to raise funds directly, the traditionally favoured large Indian corporate houses may account for lower credit off-take and certainly much reduced margins. In this scenario, it is critical to have a differentiated strategy for other market players who may have specialised needs. In many ways, product and service innovation are tied together. But two factors that have nearly revolutionised the banking industry from a service perspective are technology and outsourcing. Central processing, made possible through technology and outsourcing, made possible through an expanding workforce, have vastly added the channel delivery capabilities. Interestingly, many of the banks which were forerunners on the technology front are now grappling with obsolescence and face capacity constraints. Having leveraged superior technology in the past to drive productivity gains, they are now facing upgradation and investment challenges. A lot of the change in banking has been driven by customers. We can take this concept of customer one step further and analyze the change in the nature of stakeholders. Banks have come a long way in terms of their stakeholders. For one thing, disinvestment has brought in a larger shareholder base spread across the country, even as the government retains its significant stakes. Since bank stocks are among some of the prime movers on Indian exchanges, trading community in general has a stake in banks' share prices. The discussion on stakeholders cannot be complete without the inclusion of non-resident banks, the eager future stakeholders. While the promise of opening of the financial sector remains an unsure and tentative one, the world keenly watches for that opportunity space in the changing scenario. The author is country executive for India, Bank of America
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