Significant difference between old and newer banks’ performance

Significant difference between old and newer banks’ performance

Mumbai: Management consulting firmMcKinsey & Co. Ltd’s latest report on Indian banks, released on Monday at a banking conference in Mumbai, said the best banks in the country have global capabilities and best practices, but added there is a significant difference between these banks and the rest.

According to the report India Banking: Towards Global Best Practices, Insights from Industry Benchmarking Surveys, not only are global banks keen to build their presence in India, several Indian banks are now pursuing global ambitions.

The McKinsey survey has found Indian banks largely competitive, but there is a clear divide between the performance of old and newer banks on several parameters. While, on the surface, most banks in India currently have similar levels of profitability, there are “dramatic differences" in the underlying economics, it said.

The profitability of the wholesale banking operations of “attackers" or the new private and foreign banks, according to the report, is much higher compared with the incumbents—public sector and old private banks. It also said the Reserve Bank of India (RBI) has to facilitate the “rapid transformation" of incumbent banks and “support the globalization efforts of the attackers".

The survey studied personal finance, retail banking, IT benchmarking, organizational performance profiles and asset-liability management areas in 14 leading banks in India—a mix of public sector, private and foreign banks.

According to McKinsey, the Indian banking sector has performed well in terms of providing high returns to shareholders over the past few years. It has contributed more than 5% to gross domestic product by creating millions of jobs and has managed to reduce the level of non-performing assets by improving capital allocation. It also said Indian banks are the most profitable in the world.

Aditya Puri, managing director of HDFC Bank Ltd, is highly critical of the Mckinsey report and said it does not take into account the high reserve requirements that Indian banks have to maintain with the central bank.

But according to Puri, Indian banks need to keep cash reserves with RBI on which they do not earn any interest and also invest 25% of their deposits in government securities. Given the cost of these, Puri said, “banks in India are not obscenely profitable. I would say the profitability is lower than some of the others". In his opinion, new private sector banks are working under difficult conditions here as there are not many credit bureaus, unlike in developed markets, and acquiring the credit history of customers is a challenge in itself.

Also speaking at the conference, McKinsey Asia chairman Dominic Barton said: “Customers in India are satisfied with the banking services. They are also the most demanding in the world, definitely more than its (India’s) Asian peers." Barton sees this trend increasing and, thus, predicts that Indian banks have to be more “innovative to provide superior levels of services".

According to the firm, treasury operations are a significant contributor to banks’ profits—on an average, 20-30% of the profits come from this. The treasury divisions are profit centres of the bank and are also responsible for risk management. The survey, however, pointed out that while the private sector and foreign banks use several sophisticated risk management measures, public sector banks still lag and need to step up their risk management practices in treasury management.

The other issue facing public sector banks is that of hiring and managing talent. According to the report, these banks “suffer from a severe lack of specialist skills and new-age leaders". While private and foreign banks are doing better on talent management, they are still faced with “talent shortage" and will have to “innovate to retain and attract more talent in the future".