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DBR | 1호 (2008년 1월)
From Knowledge at Wharton
India's banking industry these days finds itself on a treadmill where it has to keep pace with the country's rapid growth by servicing a customer base with global options. A report by consulting firm McKinsey & Co. finds that while Indian banks fare well by global standards on a few counts, including increasing shareholder value, they will have to do much more to stay competitive.
India's banking industry fared better than its Asian peers on two out of five objectives that McKinsey identified. They scored high marks in increasing shareholder value and allocating capital efficiently, the report finds. They also compare favorably on a third parameter -- contributing to India's GDP (gross domestic product) -- on a global scale.
Indian banks, however, don't look as good in fostering "financial inclusion"; banks in other countries do a better job of tapping household savings. Also, they could do a better job of managing intermediation costs -- the spread between the interest rate on loans advanced and that paid for deposits -- more efficiently.
Indian banks have a lot of ground to cover in participating in the country's GDP, says Rajesh Chakrabarti, professor of finance at the Indian School of Business in Hyderabad. "Bank credit accounts for about 40 percent of GDP in India, but it far exceeds the GDP in other Asian countries like Hong Kong, China, Taiwan, Singapore and Malaysia," he says.
Indian banks achieved the highest pre-tax returns on investment across Asia in 2006, compared to those in Malaysia, China and Thailand. That performance helped Indian banks post the highest returns to shareholders as measured by stock market banking indices.
Indian banks have improved capital allocation dramatically during the past four years, and this is evident in the decline of their gross non-performing assets (NPAs) as a proportion of total loans -- from 9 percent in 2003 to about 3 percent, the report finds. Indian banks could achieve that with a lot of help from a booming economy, but they deserve credit also for making better lending choices, McKinsey says.
The intermediation cost -- or the spread between the average deposit rate and the lending rate -- at Indian banks is high compared to that in the U.S., Singapore, and China. A significant reason for this is that Indian regulators require banks to maintain 25 percent of their deposits in what is called a "statutory liquidity ratio," or SLR, which in effect allows government-sponsored programs to access those funds at below-market interest rates. India's central bank also requires banks to earmark 40 percent of their advances for so-called "priority sectors" like agriculture and small business, where the returns are patchy and banks encounter bad debts.
"Those reserve requirements are hangovers from the past for India," says Wharton finance professor Franklin Allen. "They have to be dismantled."
The McKinsey surveys also revealed fundamental shifts occurring in the composition of Indian banks, with newly emergent private banks -- McKinsey calls them "attackers" -- rapidly stacking up gains over the older, incumbent banks, with improved customer service, better risk management, and leveraging of IT skills to expand their global reach. Consequently, in the last seven years, these attackers have increased their market share of Indian banking assets.
"The attacker banks use innovative distribution channels," says Joydeep Sengupta, director at McKinsey and leader of the firm's financial services practice in India and Southeast Asia, who co-authored the McKinsey report. "They use non-branch, feet-on-the-street sales force channels much more aggressively than we have seen in banking in most parts of the world."
On the measure of "credit and risk best practices," Indian banks fare well against their global peers, although incumbent banks fall short, the report says.
McKinsey's surveys also reveal that Indian banks have done better than their global peers in organizational performance, "given their historic access to superior talent." The report also puts Indian banks ahead of their Asian counterparts in "distribution efficiency," while both share equal scores in "marketing and sales."
In using technology to shore up their performance, the best banks in India "are among the most efficient in the world," the McKinsey report says. In one specific measure of IT spending per 1,000 accounts, the "best Indian banks" spent an average $10.2 in 2007, while European banks averaged $76, the firm notes.
On customer satisfaction, which McKinsey rates as "the biggest driver of value," the report says the attacker banks have "revolutionized levels of convenience and provide customers with superior service." At the same time, the attacker firms also have "more customers with negative experiences" than the incumbents.
According to Sengupta, McKinsey's research reveals that the corporate customers of Indian banks tend to be less forgiving about inferior customer service than individuals. "For the corporate customer, the ability to access funding overseas at a relatively cheaper rate very quickly and conveniently is a big dimension, besides access to innovative products and best-in-class risk management systems," he says. However, the leading Indian banks are able to meet those requirements for the top-tier corporations, he adds. "The challenge Indian banks face is in the next tier -- the slightly smaller corporations -- for whom they need to provide the same level of service and range of products."
Although Indian banks look good in select areas versus their global peers, they are relatively small, says Sengupta. But India's economic growth and the banking industry's efforts to meet global standards will change that picture dramatically in a decade, he notes. "Five years ago, no Indian bank had a market capitalization of more than $5 billion or $6 billion. Today, you have at least two banks (the State Bank of India and ICICI Bank) with market caps of $30 billion to $40 billion. Roll the clock forward 10 years, and you can easily see that crossing $100 billion to $150 billion, and at least two or three truly global banks emerging from India."