Competitive strategy for the new private sector banks: an analysis of the banking sector in India today

Abstract

The new private sector banks are a critical part of the financial sector reform program. In the years to come these are expected to be in the forefront of providing international quality service in the economy and catering to the needs of both individuals and corporate. The strategies to be followed by such banks in this early stage of their evolution are thus of paramount importance. Since they also constitute a signal on the success or failure of the privatization program as well as the financial sector reform. A mature financial services sector sees an overlap between the core banking sector and the other players: the Development Banking Institutions and the Non-banking Finance Companies. This occurs due to trends of disintermediation and securitization. The banks find that what has hither to been their core business (plain vanilla lending largely for working capital) is no longer their fiefdom with corporates increasingly looking to seek alternative cheaper sources of finance. The challenge is for banks to be able to foresee and chalk out strategies to handle this scenario. Financial sector reform begins life with a head start over most existing scheduled commercial banks in India today: a clean balance sheet high net worth fulfillment of capital adequacy norms a professional organization of heavy investments in information technology. However they are handicapped primarily by a limited branch network resulting in low depositor base resulting in reliance on market borrowings for funds. This high cost of funds could prove critical at a time when these banks are trying to develop business and woo customers away from existing players amongst the banks. Also the competition with NBFCs for deposits has become fierce and the future appears to hold the prospect of a lending rate war which could worsen the situation. These banks are thus today faced with two sets of questions: how to attract customers for those products that all banks offer and what specialized products to offer that will set them apart. These banks should currently place emphasis on high net worth individuals and corporates to minimize transaction costs due to their low reach. To attract such a clientele the important parameter is service quality and to provide and maintain this service quality these banks will have to build and organization culture around innovation responsiveness and flexibility in operation Analysis also reveals that these banks with current limited number of branches and emphasis on low manpower are ill equipped to handle the requirements of product offerings in the retail market reach constant monitoring and follow up The wholesale market on the other is in tune with their target clientele It is recommended that these private sector banks should attempt to become the banking equivalent of a “one- stop shop” and provide a gamut of services to the corporate client . The need of the hour is to build a loyal client base and also to try all means to reduce the cost of funds through developing a branch network in as short a time as possible.