Can you put us in touch with public sector banks? They might be interested in visiting our campus,” said a friend recently. He is about to graduate with an executive MBA from an Indian Institute of Management.
The conversation was ironic. A year ago, he had courageously quit his job of seven years in the public sector, taken a Rs10 lakh education loan, and ventured to try his hand in the seemingly gravity-defying world of high finance. We have all read about the “flight to safety” of bank depositors. Here, a group of MBA students was wondering if lateral entry into public sector undertakings (PSUs) is an option.
Be it a race for new business or the hunt for talent, the turbulent times and the resulting anxiety are offering a serendipitous gale of fresh air to the public sector. They have depositors flocking to them, sky-rocketing demand for credit, humbled competition and young talent showing interest. Will the sector bask in this glory while it lasts or take steps to turn this serendipity to a sustainable edge? The answer, in my view, lies in five steps that public sector banks must take.
Illustration: Jayachandran / Mint
1. Consolidate the deposit franchise: This crisis has established the primacy of retail deposits, where PSU banks are incumbents. They hold a dominant share. However, their franchise has been vulnerable. A few retail customers—as low as 5% of the total—account for at least 70% of deposits. Over the last decade, the private sector challengers have been cherry-picking these best customers. Further, young customers have preferred tech savvy new private sector banks.
The current flight to safety to PSU banks is a great opportunity. Customers are coming in, currently out of fear. Put your arms around them with great service and quality products. Create a priority customer scheme that makes the customer feel valued. Offer personal attention. Take away the reason why they had severed ties in the past. Only a handful of PSU banks have a priority offering for depositors. Most others should create one quickly.
2. Catch up in select business segments: Over the last decade, the new private sector banks have taken the lead in select business segments. Consider corporate banking. Public sector banks have been the stable supplier of credit to Indian companies. However, the fee income earned from companies by these banks is far below their fair share. All bankers know the importance of fee income for profitability. It is time to develop capabilities to manage relationships, demand fees and master technology. There are many other segments such as this that offer an opportunity to catch up.
3. Launch new lines of businesses: Over the last decade, new areas of business have grown very fast. The public sector has avoided business lines associated with highly skilled manpower. Private sector bank and non-bank players are firmly established as incumbents. Wealth management is an example on the retail side. Merchant banking and investment banking are examples on the corporate side. These lines are integral to a universal bank’s portfolio. Bank customers need them. And you don’t want your customers to go to someone else to fulfil their genuine needs. The current turmoil offers an opportunity. It is time to build up these businesses with unique business models and customer promise with public sector ethos. Take wealth management as an example. Most people have lost money and many doubt their relationship managers for conflict of interest. How many customers doubt a PSU bank’s transparency? Time to enter.
4. Cherry-pick good credit: These are extraordinary times. Credit demand is high. Companies—good and bad—are falling short of credit. Smart bankers will cherry-pick the best customers. The same clients, who had creditors and investors lining up a few months back, are gasping for financing. While there is not enough credit for everyone, the PSU banks have an edge. They have depositors flocking to them. They can pick customers. It is time to acquire good customers, build relationships and cross-sell. These assets will pay back handsomely when the cycle turns.
5. Fill talent gaps: The talent crunch has been a sore problem. Now, people such as the friend I wrote about are willing to consider the public sector as a launch pad. This attention is ephemeral, but an opportunity nevertheless. PSU banks should take short-term measures to capture this talent. They should also use this opportunity to make some long-needed changes in HR policies to retain the talent. First, they need to change the way they hire. Employees have to be courted the same way as customers are. So many public sector banks have had image makeovers for customers. How about an image makeover for potential employees? Second, the banks need to create a value proposition for talent—career path, performance management system, compensation system—to acknowledge and reward performance. Finally, they need to appreciate youth psychology. A hiring freeze has resulted in a “missing generation” in PSU banks. The generation gap in values drives away new recruits faster than the monetary gap in compensation.
The chilly storm of the financial crisis is providing strong tailwinds for PSU banks. Use these to catch up. Or will PSU banks turn off the propellers and save fuel?
Saurabh Tripathi is a partner and director in BCG India. These are his personal views. Comment at email@example.com