Choosing Strategies that Matter Lessons for Indian Public Sector Banks

Dr Ranjan Das
Professor of Strategic & International Management, IIM Calcutta Consulting Editor, Strategic Marketing
Raveendra C. Doctoral Research Scholar, IIM Calcutta

Liberalisation and de-regulation process initiated by the Indian Government in early nineties has completely changed the face of the Indian banking industry. The entry of new private sector banks with the state-of-the-art technology and lean structures has forced the old private-sector and public-sector banks to respond to the new challenges with aggressive restructuring measures. The past five years have seen the public sector banks rapidly introducing new products and services, computerising and networking key branches, rationalising manpower and launch a number of initiatives to improve operating efficiencies. Are they on the right track? Are these strategies to become leaner and meaner sufficient to gain a competitive advantage to survive and grow in the long run? This article argues that while all the above measures are no doubt necessary to survive, they are by no means sufficient. To survive and thrive in the long run, banks need to pursue strategies that enable them to develop resources that are inimitable, rare, durable and superior to competitors.

Banking Industry in India
Organised banking was active in India since the establishment of the General Bank of India in 1786. After independence, the Reserve Bank of India (RBI) was established as the central bank and in 1955, the Imperial Bank of India, the biggest bank at the time, was taken over by the government to form state-owned State Bank of India (SBI). RBI had undertaken an exercise to merge weak banks to strong banks and the total number of banks thus reduced from 566 in 1951 to 85 in 1969.
With the objective of reaching out to masses and meeting the credit needs of all sections of people, the government nationalised 14 large banks in 1969 followed by another 6 banks in 1980. This period saw enormous growth in the number of branches and the banks’ branch network became wide enough to reach the weakest sections of the society in a vast country like India. SBI’s network of 9033 domestic branches and 48 overseas offices is considered to be one of the largest for any bank in the world.
The economic reforms unleashed by the government in early nineties included banking sector too, to a significant extent. Entry of new private sector banks was permitted under specific guidelines issued by RBI. A number of liberalisation and de-regulation measures aimed at consolidation, efficiency, productivity, asset quality, capital adequacy and profitability have been introduced by the RBI to bring Indian banks in line with International best practices. With a view to giving the state-owned banks operational flexibility and functional autonomy, partial privatisation has been authorised as a first step, enabling them to dilute the stake of the government to 51 per cent. The government further proposed, in the Union Budget for the financial year 2000-01, to reduce its holding in nationalised banks to a minimum of 33 per cent on a case by case basis.

Structure of the Indian Banking Industry
As of March 31, 2003, there were a total of 289 scheduled commercial banks in India. Chart 1 illustrates how these banks were structured1.
Table 1 gives the banking measures of deposits, advances and net profit as at March 31, 2003 for the key constituents namely, public sector banks, private sector banks (new - which came into existence after liberalisation of nineties and old - which were in existence from before), foreign banks and regional rural banks. Even though regional rural banks number 196, they have a minuscule share of 3.4 per cent of customer deposits and 3 per cent of net profit of the industry total. Similarly, the older private sector banks are mostly regional players and enjoyed a small share. The public sector banks including the State Bank group (SBI and its subsidiaries) dominate the industry with 77 per cent share of the deposits and 70 per cent share of net profit. Excluding SBI group, public sector banks still command a very high share of close to 50 per cent share of the total industry in terms of deposits.

Foreign Banks and New Private Sector Banks
Though the new private sector banks and foreign banks have a lower share in customer deposits (8.2 per cent and 4.9 per cent respectively), they command a higher share of the net profit (9.8 per cent and 10.4 per cent respectively). Due to restrictions on branch expansion, foreign banks traditionally focused their operations on the top 25 cities of the country. However, they differentiated their operations by focusing on premier customers and set superior standards in productivity, customer service and operating efficiencies by using state-of-the-art technology. Global best practices were introduced and practiced. More importantly (as we will discuss later), they built durable competencies by attracting the best manpower, building proprietary technologies and processes and by building strong brand image. The new private sector banks modelled their strategies after the foreign banks. They built much larger branch networks than foreign banks, though small by comparison to public sector banks and pose, by far, the greatest challenge to the dominance of public sector banks.

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