| dc.description | EXECUTIVE SUMMARY
The Indian banking industry is in the midst of complete transformation. The liberalization
process of the government in the industry has provided a unique opportunity for growth
to the players in the industry. Traditionally the industry was heavily regulated with the
government controlling everything from the nature of banks, scope of operations, cost of
borrowing and lending, number of branches etc. All this resulted in institutions with a
large amount of non-performing assets (NPAs) and a non-competitive attitude as business
was granted. _
With liberalization, the banks are looking to diversify their scope of operations and take
advantage of economies of scope and scale. The banks are currently on a race to become
the first to offer new products and capture the first mover advantage in an industry which
is expected to take off in the future.
The concept of 'Universal Banking‘ is changing the way the banking business is
conducted in India. Banks are aggressively lying to become a one stop financial shop
providing all type of finance related services to their customers. Universal banking offers
a number of advantages to the bank such as ability to raise low cost funds, ability to offer
a complete range of services, ability to cross sell products, revenue model and
flexibility in spreads. The disadvantages are the risks of smaller players defaulting by
entering into areas where they cannot manage risks, and the impact of the failure of a
large bank is likely to be disastrous on the financial market.
Banks have traditionally adopted two strategies to transform into universal banks. One is
the mergers and acquisitions where banks are acquired in order to increase size and make
quick entry into new areas. The second route is through organic growth where the bank
slowly and gradually establishes its competencies in all the segments.
ICICI’s business strategy can be summarized as follows:
0 Focus on quality growth opportunities by maintaining and enhancing the
company's strengths in corporate banking and building a strong retail franchise
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Diversification of Financial Services in India — Experience of lClCl
I Emerging into a Universal bank offering a one- stop service to all its customers
and cross sell its products
0 Emphasize conservative risk management practices and enhance asset quality
0 Use technology for competitive advantages
ICICI has adopted a two-pronged approach to becoming a universal bank. ICICI is
looking at internal growth where it has the competency and is acquiring banks where it
requires outsourcing the competency.
We have examined the diversification process at ICICI in some detail, and seen the way
ICICI has entered extremely diverse businesses, not all of which fun part of the core
proposition. We have examined the attempt to be a universal bank and note that certain
businesses do not have very strong synergies with the core offer. They do not afford cost
benefits nor do they bring in new customers. Also, some businesses do not appear to have
the potential to be viable standalone businesses.
The core business can be split into retail and wholesale, and we have separately looked at
the key success factors in these segments and the synergies between them. We feel that
the retail business is not large or dense enough to justify a deeper penetration of the
market.
The lessons we can draw from the ICICI experience include a set of considerations for a
would-be universal bank:
l. Access to finance on a global scale
2. Distribution reach both through own and shared distribution networks‘ While
reach is important, it needs to be selectively applied in a nascent market.
3. Strong Brand Name is critical to gain the credibility and trust of customers as well
as to reduce the bargaining power of the distributors and induce them to carry the
product
4. Global client relationships will be critical to attract and retain business from
foreign customers setting up in India or even Indian businesses expanding abroad
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Diversification of Financial Services in India - Experience of lCICl
I
5. Sound product expertise because customers will always compare products and the
cost of switching from a single vendor to different suppliers of financial products
is too low to allow any inefficiency in any product. The portfolio offer is not
’ compelling enough to the customer
6. A track record would be important in wining new business
7. Aggressive, can-do attitude as part of the organization culture and empowerment
and high levels of motivation will be essential. The old staid organizations will
lose business.
8. Performance norms need to be defined for every employee and the focus should
be far more on contribution and contribution margin than on any other measure.
We believe that the Indian market would remain highly fragmented on the retail side,
while some consolidation will be seen on the wholesale, investment banking sides. While
this is the norm in many markets, in India, with the market still being small in times of
value if not in numbers, it would keep profitability of firms relatively low and cost to the
customer fairly high, particularly on the retail side.
~me most successful model for a financial services entity would have to
be la focus strategy operating in specif segments, and consolidation and alliance
building would be the next major step in dispersive wherein you add first the range
of services and continue to focus on key geographies. The broadcasting of products and
services to new markets and population strata should be the last phase of dispersive
into a maturing market. | en_US |
