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Indian banks, the dominant financial intermediaries in India, have made good progress over the last five years, as is evident from several parameters, including annual credit growth, profitability, and trend in gross non-performing assets (NPA). While the annual rate of credit growth clocked 23% during the last five years, profitability (average return on net worth) was maintained at around 15% during the same period, and gross NPA fell to 2.3% as on March 31, 2011 from 3.3% as on March 31, 2006. India's gross domestic product (GDP) growth will make the Indian banking industry the third largest in the world by 2025.
The Indian banking industry can be categorized into non-scheduled banks and scheduled banks. There are about 67,000 branches of scheduled banks spread across India. As far as the present scenario is concerned the banking industry in India is going through a transitional phase. The public sector banks (PSB), which are the base of the banking sector in India account for more than 78 % of the total banking industry assets. Unfortunately, they are burdened with excessive Nonperforming assets (NPA), massive manpower and lack of modern technology. On the other hand the private sector banks are making tremendous progress. They are leaders in internet banking, mobile banking, phone banking, and ATM. As far as foreign banks a re concerned, they are likely to succeed in the Indian banking industry.
Five Forces Model For Indian Banking Industry
Threat of New Entrants
The average person can't come along and start up a bank, but thereare services, such as internet bill payment, on which entrepreneurs can capitalize. Banks arefearful of being squeezed out of the payments business, because it is a good source of fee-based revenue. Another trend that poses a threat is companies offering other financial services.What would it take for an insurance company to start offering mortgage and loan services?Not much. Also, when analyzing a regional bank, remember that the possibility of a megabank entering into the market poses a real threat. In Indian banking industry, the main threatsare foreign players and Non Banking Finance Companies
Power of Suppliers
The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. In Indian Banking industry, RBI acts as a regulatorwhich pose a big threat for banks as a supplier of money
Power of Buyers
The individual doesn't pose much of a threat to the banking industry, butone major factor affecting the power of buyers is relatively highswitching costs.If a personhas a mortgage, car loan, credit card, checking account and mutual funds with one particularbank, it can be extremely tough for that person to switch to another bank. In an attempt to lurein customers, banks try to lower the price of switching, but many people would still ratherstick with their current bank. On the other hand, large corporate clients have banks wrappedaround their little fingers. Financial institutions - by offering better exchange rates, moreservices, and exposure to foreign capital markets - work extremely hard to get high-margin corporate clients.
Availability of Substitutes
As you can probably imagine, there are plenty of substitutes inthe banking industry. Banks offer a suite of services over and above taking deposits andlending money, but whether it is insurance, mutual funds or fixed income securities, chancesare there is a non-banking financial services company that can offer similar services. On thelending side of the business, banks are seeing competition rise from unconventionalcompanies. All offer preferred financing to customers who buy big ticket items. If carcompanies are offering 0% financing, why would anyone want to get a car loan from the bank and pay 5-10% interest?
The banking industry is highly competitive. The financial servicesindustry has been around for hundreds of years, and just about everyone who needs bankingservices already has them. Because of this, banks must attempt to lure clients away fromcompetitor banks. They do this by offering lower financing, preferred rates and investmentservices. The banking sector is in a race to see who can offer both the best and fastest services,but this also causes banks to experience a lower ROA. They then have an incentive to take onhigh-risk projects. In the long run, we're likely to see more consolidation in the bankingindustry. Larger banks would prefer to take over or merge with another bank rather than spendthe money to market and advertise to people.
Being a relatively late entrant into the Indian banking, Yes bank differentiated itself by offering a new value proposition. According to Kapoor Yes bank was a knowledge driven bank that sought to differentiate itself with its service orientation, technology and human resources. "I think we are a differentiator for emerging India, the small and medium enterprises, where there is a terrific development taking place," said Kapoor. Rather than expanding very quickly, the bank focused on a niche segment of customers. Its aim was to establish itself as a knowledge based and technology driven bank that would cater to the needs of the emerging Indian economy.
The bank followed a first of its type approach called knowledge banking - a unique method of acquiring customers and retailing them. It provided specialised services to the emerging sectors of the economy through a better understanding of its clients' businesses and industries.
The bank focused on providing customers with specialised banking services depending upon the requirements. It identified some sectors of the economy which had good growth prospects. These sectors are: Food and Agribusiness, Life Sciences, Telecom, IT, Infrastructure and Media & Entertainment. The bank aims to provide niche banking solutions to these emerging sectors through industry specialists. This is achieved by employing people who had experience in these key sectors. The bank's branches are staffed with employees who had an educational background in engineering and management. People who were employed as knowledge bankers were generally past employees from the middle and senior levels in various industry segments with a good amount of experience. Yes bank realised that this will help it to understand the commercial activities of the client better, to understand their needs and to ensure that it spoke the 'language of the clients'.
Since most of the private sector banks focused on retail banking, Yes bank sought to initially focused on corporate banking by offering specialised services to corporate customers. The bank carved a niche market for itself in specialised corporate services like mergers and acquisitions, financial restructuring, currency risk management, etc. It also focused on providing wealth management solutions to affluent customers. However, in 2005, Yes bank forayed into retail banking. And by early 2008, the bank had a presence in corporate and institutional banking, financial markets, investment banking, restless and transactional banking, retail banking and private banking.
Despite being a late entrant, Yes bank established itself as one of the most efficient banks in the country by adopting ISO standards and six Sigma for improving its operational efficiency and providing exceptional service to the customers. As of October 2007, it had 60 branches spread across India and for the third quarter ended December 31, 2007, total net income had gone up by 152% to Rs. 2.05 billion from Rs. 0.8 1 billion for the same quarter in 2006.
Building A Strong Foundation
When Yes bank was preparing to enter the market, many industry experts question the rationale of its decision to make so late and entry, especially when the Indian banking arena had so many established players. They pointed out that it was entering an already overcrowded market dominated by public sector banks such as the State Bank of India (SBI) and private banks such as ICICI bank and HDFC bank. In addition, there were many cooperative banks and a few foreign multinational banks. Moreover, many of the product lines of these banks had become commoditised.
While Yes bank had high ambitions for the Indian market, analysts felt that many challenges lay before it. Being a start-up, it had to not only take care of infrastructure and lease agreements for setting up branch offices, etc., but also of the recruitment of staff and management, which in itself would be an overwhelming task.
From an early age, the promoters of yes bank National human capital as an enabler of the bank's business strategy of differentiating itself from its competitors. As such, it gave utmost importance resource function. It wanted to"build a world-class team, based on operational recruitment methodologies, and attract the best talent in the industry." It considered human capital as an organisation's biggest asset and viewed it as a source of long-term competitive advantage. According to Kapoor, "human capital creation focuses on the economic behaviour of individuals and on the accumulation of knowledge and skill which enables them to increase their and the organisation's wealth and productivity." According to him, investment in human capital ensure the economic returns for the employees as well as the organisation, and this went a long way in achieving the goals of the organisation.
Yes bank worked with one of the world's leading HR outsourcing and consulting firms, Hewitt Associates, to position itself as a preferred employer in the banking and financial services sector and emerge as one of the best employers in the country. Hewitt developed the recruitment strategy, help the bank set and evolve its organisation structures and also worked with the bank's HR team to set HR policies and processes based on global best practices. The company opted for a flat matrix-based organisation structure. This organisation structure is part of yes bank's business strategy. It has been evolved to facilitate faster decision-making, better project management and efficient cross-functional teamwork, all of which are critical in this phase when we are building the edifice of the bank the fact structure ensures effective interpersonal communication, customer proximity and greater responsibility for each employee across the entire organisation. The bank aims to create an employer brand and become one of the preferred employers.
HUMAN CAPITAL AS YES BANK'S STRATEGIC ASSET
At the beginning of its existence yes bank relied heavily on employer referrals, web-based hiring and consultants to source talent. The HR department works to attract high-quality talent and build a strong yes culture based on the core values of the bank. In the short term the bank aims to create an organisation that is able to attract and nurture high quality human capital in order to achieve industry leadership through the quality of people working at yes bank.
The bank wants to utilise the expertise of highly qualified and experienced executives to oversee the bank's initiatives in various business segments. For the top most management levels the bank has hired high-profile executives from reputed organisations like Bank of America, Citibank, etc. Yes bank was able to attract these executives as they were given bigger roles and challenges. The company also provided a generous compensation package for them with variable pay accounting for 25 to 50 percent of the cost of company. These were in the form of bonuses and stock options. The pedigree of the top-level team developed the founders of yes bank helped the bank earn the confidence of the market.
The bank outsourced 50 percent of the recruitment process to different agencies as it was not its core activity. The outsourcing of recruitment activities helped it to reduce cost in the range of 10% to 40%. Yes bank paid its employees more than the industry average in order to hire talented people. Yes bank is the first bank to include a 5% executive ownership clause.
Even though the bank primarily follows lateral hiring, it also hires some graduates from leading business schools in India. The bank employs people from diverse backgrounds. Its workforce profile consists of employees who differ in educational background, experience, age and gender distribution. Retaining talented employees in the organisation was also one of its main focuses because of the scarcity of talented employees in the financial services sector in India. In this way, it is able to establish a strong employer brand. The bank aims to create for itself, an image of a young and dynamic bank of the developing Indian economy. It wants to grow as a bank based on its Employee Value Proposition of 'Creating and Sharing Value'. It expects its employees to absorb these organisational values so that the same values are communicated to its customers.
Yes bank's knowledge banking approach and emphasis on highly qualified human resources has helped it differentiate itself from other private banks in an increasingly commoditised market. The bank has successfully differentiated itself through the superior service offered by its employees. It has been able to create an entrepreneurial culture that stimulates and fosters innovation not only in new products, new services and new processes but also in new business models.
According to Kapoor, the bank focused on developing its human capital has paid off. But, the real challenge for yes bank is to be able to retain its talented professionals even though it has made an impressive entry into the banking arena and has been able to maintain its strong growth. It will be even more difficult to effectively handle its human resource while pursuing its massive expansion plans of increasing its staff capacity in the years to come.
THE MAIN REASONS FOR FINANCIAL SUCCESS OF YES BANK
The bank has been able to achieve financial success and growth through five instruments:
Focused business strategy
Entrepreneurial culture and leadership
Highly rated employees
How Ideas Built Yes Bank
Outsourcing: Technology is outsourced, ATMs are outsourced, soon even branch buildings may be outsourced.
Knowledge Banking: Executives don't only peddle common banking solutions. They also act as consultants delivering business solutions.
Microfinance Direct: Among the earliest to start offering micro-loans directly to poor customers.
Futuristic Branch: A chip embedded in the debit cards of top customers alerts staff when one walks in. An executive meets him and greets him by name. This technology is on trial in the South Extension branch in Delhi.
Double Security: Besides their regular password, a second code is also generated just in time, and delivered to the customer's mobile.
Honey Farming: The bank has extended small loans of about Rs 25,000 each to over 2,000 bee farmers. The farmers provide their stocks of honey as collateral.
YES-Professional Entrepreneurship Programme (YPEP): The bank tapped the B-school alumni network to hire top-notch graduates unhappy with the jobs they had chosen. That's now become a campus strategy. Currently, there are 270
Responsible Banking: A key differentiator for the bank, the programme's aim is to develop innovative business solutions for social and environmental problems.
Money Monitor: Savings account customers get an online personal finance and wealth management software.