Being Five Star in Productivity

Being Five Star in Productivity: Roadmap for Excellence in Indian Banking A
Being Five Star in

Productivity
Roadmap for Excellence in Indian Banking
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Being Five Star in
Productivity
Roadmap for Excellence in Indian Banking
bcg.com
Saurabh Tripathi
Bharat Poddar
August 2011
The Boston Consulting Group, Inc. 2011. All rights reserved.
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Being Five Star in Productivity: Roadmap for Excellence in Indian Banking 3
Contents
Executive Summary 5
Productivity Excellence An Obligation 7
Obligation of Indian Banks: Stay Healthy; Be Leaner 7
Bank Margins in India: Too High or Quite Low? 8
Productivity Excellence: Need of the Hour 10
Being Five Star in Productivity: Beyond Traditional Notions 11
Branch Sales and Service Excellence 13
Redefine Role of Branches and Roles Within Branches 13
Redesign of the Branch for the Next Generation 15
Introduce Structured Sales Processes 16
Simplify Product Portfolio 18
Public Sector Needs to Build Investment Advisory Capability 18
New Channel Excellence 20
Embrace the Mobile 20
Leverage New Channels for Productivity Enhancement 21
Ensure Adoption: Get Over the Hump 22
Extract Full Potential of ATMs 23
Be the New Channel Champion Who will win the next battle in Indian banking? 24
Lean Operations and Operating Model 25
Create Lean Processes Through Customercentric BPR 26
Align Operating Models to the Business Units 27
Significant Increase in IT Investment Required in the Public Sector 28
Public Sector Needs a New Strategy for IT Investment Beyond CBS 29
HighPerformance Organization Design 31
Lean Overheads: Cut with Care 31
Bolster Finance and HR Expertise 32
Invest in Performance Measurement: Measure New Things to Get New Things Done 33
Reform the Public Sector Compensation Model 33
Adopt Alternate Manpower Solutions: Critical for Low Cost Banking 34
Bad Debt Management Proactive, Preemptive, and Preventive 35
Address Weaknesses Where they Hurt Most 35
Build Risk Skills in the Public Sector 36
Adopt New Paradigm for Risk Management 37
Imperatives for Government and RBI 39
Note to the Reader 42
For Further Reading 44
4 The Boston Consulting Group
W
e release this report in the midst of
gl obal uncertai nty: S&P has
downgraded the US credit rating and
most of the Western world and Japan
face a debt crisis. Central bankers
throughout the world face an unprecedented situation. In
the midst of the economic maelstrom, India stands out as
a relative oasis of stability. Prudent regulatory oversight
from RBI over the last decade has successfully steered
Indian banks towards robust health and performance.
This report highlights tremendous scope for Indian banks
to improve their productivity from this strong base. Indian
banks can be a benchmark in the world in productivity
excellence and consequently in proftability.
Productivity excellence, however, is not merely an
opportunity for higher value creation, but it is an
obligation for Indian banks. Global banking crisis has
highlighted the criticality of banks behaving responsibly;
aligning to priorities of the real economy. For India to
achieve its vision of rapid and inclusive growth, Indian
banks have an obligation to serve the vast number of
unbanked masses, underbanked farmers, and MSMEs.
In order to do so at low cost and reasonable margins
banks have to push the frontier on every dimension of
productivity. Productivity increase can counter the short
term pressures on proftability from rising interest rates,
rising bad debts, and imminent savings bank rate
deregulation.
This report sets out an action agenda based on insights
from an extensive productivity benchmarking conducted
across 40 banks in India coupled with project experience
of The Boston Consulting Group (BCG) in India and
abroad. The report argues that banks have to strive for
excellence on fve dimensions branch sales and service,
new channels, lean operations, organization design, and
bad debt management. In each area, industry looks very
sound at an overall level but disaggregation of
performance into components and comparison across
players exposes a lot of room for improvement.
Branches can generate higher levels of revenue for the
banks. There is as much as 5X diference between the
best and the worst bank in each category in terms of
business generation per branch. Indian banks deploy 62
percent of staf in customer facing roles as against the
benchmark of 82 percent observed by BCG globally.
Banks can increase the efective time of branch staf for
sales and service through empowerment of branch
managers, role redefnition of staf, redesign of branch
format, process reengineering, and simplifying their
product portfolio. Public sector seems to be holding itself
from proper investment advisory to retail customers. This
can be a costly mistake.
Break out growth in usage of new channels will
characterize the next decade in Indian banking. Among
the new channels, mobile phones, propelled by 3G and
smart phone technology, will emerge as an undisputed
winner by 2020; potentially accounting for 2030 percent
of total transactions. ATMs have seen exponential growth
in usage but are far from maturity with just about 50
percent adoption even in metros. There is as much as 5X
diference in ATM usage across banks. Banks investing
ahead of the curve will emerge winners in this next wave
of retail banking. They need to begin with investing in
adoption. New channels will not only enhance the
productivity but can be a source of new customer
acquisition. RBI has to encourage and not just permit
experimentation for the full potential in mobile
technology to play out.
Executive Summary
On efciency, Indian banks are doing well overall with
industry costincome ratio below 50 percent. However,
the survey highlighted room for improvement. On an
average, Indian banks have about 20 percent of staf
deployed in backofce processing (for some banks, as
high as 40 percent) as against a global best of 10 percent
observed by BCG. Over two thirds of this processing
happens in branches and not back ofce centres, where
it should be. Backofce centres are smaller and sub
scale on an average. Process reengineering and operating
model change can help reduce costs, improve service, and
contain operating risks. Public sector appears to be
underinvesting in technology with spends at about 25
percent of global benchmarks. It needs a new postCBS
IT strategy and a new procurement framework that
encourages speedy investment decisions.
Indian banks average administrative overheads (head
ofce, etc) at about 11 percent of total staf is in line with
what BCG has observed globally. Some banks with 1415
percent overheads need to investigate further. Cutting
across bank categories, the industry appears to be holding
low head count in HR and fnance roles. Economizing on
HR and fnance capabilities may hurt the long term
health of the organizations. Variable pay at 2 percent of
fixed compensation is significantly below the 1215
percent that is found optimal for incentive compensation.
Long overdue, the public sector urgently needs an
adjustment in its compensation structure.
Whilst the industry, on an average, has an impressive bad
debt performance, the bad debt levels in priority sectors
of MSME and agriculture are high. NPA management
processes at banks need major overhaul. Speed of
response to default and speed of foreclosure are found to
be slower than required. Some banks have alarmingly
high NPA levels in relatively safe products like home
loans. The report has highlighted a whole new paradigm
for risk management encompassing operating model,
technology, experience and expertise retention, and
minimum critical size of book.
Should the banks embrace the above ideas, they can
break the compromise between proftability and serving
low ticket, high risk business at reasonable margins. At
the same time, government and RBI have enabling and
catalyzing roles to play.
Government, at an industry wide level, should expedite
real sector reforms to enable banks to manage bad debt
better. Speed of decisions in debt recovery tribunals,
quality and transparency of land records and property
titles need to be enhanced, and real estate sector
regulation needs to be introduced.
Government should introduce performance linked
compensation framework for PSU banks wherein 1215
percent of the salary could be variable for at least 75
percent of staff. It needs to create an enabling
environment where procurement decisions for technology
investment by PSU banks can be taken faster. It also
needs to push for higher levels of risk management
capability building in PSU banks through variety of
measures highlighted in this report. Smaller PSU banks
lag in business model transformation and government
needs to spur the smaller banks to transform faster.
Initiatives from RBI are required on multiple fronts. It
should defne a new paradigm in risk management for
Indian banks going beyond Basel 3 emphasizing
exante risk detection, management, expertise and
experience retention. A centre for excellence in risk
management should be sponsored by RBI to act as a
research body and senior management training facility. It
should insist on rapid roll out of Aadhar based credit
bureaus in retail, MSME and agriculture.
RBI should take a proactive approach on technology led
transformation. Benefts from adoption of mobile are so
large that they merit a proactive regulatory approach that
encourages experimentation by players. RBI should
enable banks to adopt business models with a very low
cost, local manpower in drop down subsidiaries to make
low cost inclusive banking viable. Lastly, introduction of
productivity metrics in mandatory reporting by banks
will bring it on centre stage of industry agenda.
Obligation of Indian Banks: Stay Healthy;
Be Leaner
The Reserve Bank of India (RBI) has been widely
acclaimed for steering Indian banks clear of the crisis
that engulfed so many countries. Our analysis shows that
such acclaim is welldeserved and, in fact, there is reason
for more of it. Having moved the needle on almost all
performance metrics in the last decade, the Indian
banking industry stands out for its relatively robust
balance sheet and sound performance. As shown in
Exhibit 1a, Indian banks proftability leans towards the
higher end of the spectrum while its costtoincome ratio
leans towards the lower end. In addition, bad debt
charged to P&L remains moderate and valuation is sound.
On the quality and soundness of the fnancial services
sector, India has edge over other emerging markets.
Sound performance is complemented by rapid growth
that supports Indias GDP expansion. At the current rate,
the Indian banking industry will be the worlds third
largest by 2025, as shown in Exhibit 1b. This increasing
Exhibit 1a. Indian banking: Sound health and balanced performance
Sources: OECD; IBA data; Turkish Banking Association; Central Banks of Malaysia, Singapore, Thailand and Indonesia; Thomson Reuters Datastream;
BCG analysis.
Note: Weighted averages over the years 2007 to 2009. Indian data for a year corresponds to year ending in March (e.g. April 2009 to March 2010 corresponds
to year 2009). For other countries the data corresponds to the calendar years. The valuation data is for the calendar year 2010.
1
The bad debt charged to P&L as a percentage of assets.
We are made wise not by the recollection of our
past but by the responsibility of our future
George Bernard Shaw
Productivity Excellence
An Obligation
Return on equity (%) Cost: Income ratio (%) Valuation (PBV) Bad debt to assets ratio
1
Country
Cost to
income ratio
Country
Return on
equity
Country
Price / book
ratio
Country
Bad debt to
assets ratio
19.6%
17.8%
17.4%
16.7%
15.3%
14.6%
14.0%
12.4%
10.1%
8.2%
7.9%
6.9%
4.0%
2.7%
0.8%
79.3%
75.1%
73.1%
65.7%
65.4%
59.4%
56.7%
55.6%
54.6%
47.3%
46.5%
42.1%
41.9%
40.4%
40.1%
Indonesia
Malaysia
Canada
Russia
Thailand
India
China
Australia
Turkey
Singapore
South Korea
USA
Spain
France
Germany
Indonesia
Germany
France
Canada
USA
Russia
Thailand
Australia
Malaysia
India
South Korea
Spain
Turkey
China
Singapore
Turkey
Indonesia
Malaysia
China
India
Singapore
Australia
Canada
South Korea
Spain
Russia
Thailand
France
USA
Germany
3.6
2.3
2.0
2.0
1.9
1.8
1.7
1.6
1.5
1.4
0.9
0.8
0.8
0.5
0.3
Russia
Indonesia
Turkey
USA
China
Spain
South Korea
India
Singapore
Thailand
Malaysia
Germany
Australia
Canada
France
2.4%
2.0%
1.3%
1.2%
0.9%
0.7%
0.6%
0.6%
0.5%
0.4%
0.4%
0.4%
0.4%
0.3%
0.2%
signifcance and infuence comes with a higher level of
responsibility towards the real economy. The global
banking crisis has highlighted the perils of irresponsible
banking, with the real economy footing the bill for banks
folly. To discharge their responsibility towards the real
economy, banks have an obligation to stay healthy, to
adopt balanced and proftable growth, and to strive for
higher levels of efficiency and productivity in every
aspect of their operations.
The obligation of Indian banks, in particular, goes one
level beyond staying healthy. The appalling level of
fnancial exclusion is a blot on an otherwise commendable
performance of the industry. High operating costs in
serving lowticket businesses has been the primary
barrier inhibiting initiatives statesponsored or
marketdriven from making any progress. Banks have
a responsibility to innovate and create new models of
business that operate at sufciently low operating costs.
Indian banks are obligated to be leaner and more
productive.
Excellence in productivity will help the banks break the
compromise between maintaining their proftability at
reasonable interest margins and serving high cost, high
risk customers that are on national priority.
Bank Margins in India: Too High or Quite
Low?
The debate on the obligation of the banking sector to the
real economy ofen focuses on the cost of intermediation
or the Net Interest Margins (NIMs) of the banking
industry. The classical argument is that banks should
strive to lower their NIMs and thus beneft their borrowers
and depositors. The NIM of the Indian banking industry
is about 2.5 percent. Looking at how comparable
economies have evolved, this margin is expected to hit
about 2 percent by 2020 as banks assets hit the
benchmark of 200 percent of nominal GDP (from about
90 percent at present). As is clear from the Exhibit 1c, the
Indian banking industrys NIMs are comfortably in the
middle of the spectrum and nowhere near as high as in
countries such as Indonesia, Brazil, Russia, and Turkey. Is
this a matter of satisfaction? That is not clear. First, the
effective customer spread, defined as the difference
between the interest charged to borrowers and interest
ofered to depositors, is almost one percent higher than
Exhibit 1b. Indian Banking will be worlds 3rd largest by 2025
Sources: EIU country data; OECD; IBA data; BCG analysis.
2009 2015 2020 2025
France
Germany
China
UK
US
50,000 0
Russia
India
South Korea
Brazil
Canada
Australia
Netherlands
Spain
Italy
Japan
South Korea
Russia
Netherlands
Spain
Australia
Canada
Brazil
Italy
India
France
Japan
Germany
UK
US
China
50,000 0 100,000
Netherlands
Spain
South Korea
Australia
Italy
Canada
Russia
Brazil
Japan
France
Germany
India
UK
US
China
Total banking assets in US$ billion
Spain
Netherlands
South Korea
Italy
Canada
Australia
Russia
Japan
France
Brazil
Germany
UK
India
US
China
0 120,000 60,000 0 50,000 25,000 25,000
NIM because of the Statutory Liquidity Ratio (SLR)
stipulation as shown in Exhibit 1d. So NIMs are not a fair
representation of the cost of disintermediation borne by
the customers.
More importantly, there is a crucial irony in this debate.
The performance metrics which the industry (and the
regulator) aspires to improve encourage banks to avoid
precisely the businesses that the regulator (and the
nation) wants them to do. Priority sector businesses like
smallticket rural advances, highrisk Micro, Small and
Medium Enterprises (MSME), agricultural lending to
small farmers, and lowticket deposits for financial
inclusion are all highrisk, highoperating cost, and,
hence, highmargin business. If the industry did more for
the priority sector, its cost to income ratio will be higher,
bad debt cost will be higher, and margins will have to be
higher. For an emerging economy like India with
inclusiveness as a national priority, it is not clear whether
low banking margin is in itself a worthy goal.
Exhibit 1e shows that bank systems with lower opex tend
to operate at lower margins. This report argues that it
will be more efective for the government, regulator, and
Exhibit 1c. Evolution of NIM with expansion in banking
Sources: EIU country data; OECD; IBA data; Turkish Banking Association; Central Banks of Malaysia, Singapore, Thailand and Indonesia; BCG analysis.
Note: Indian data corresponds to year ending in March 2010. For all other countries the data corresponds to the calendar year 2009.
Exhibit 1d. SLR stipulation leads to
underrepresentation of Indian NIM
Sources: IBA data; BCG analysis.
Note: Data for FY 10.
NIM (%)
8
6
4
2
0
Banking assets / nominal GDP (%)
600 300 200 100 0
USA
Turkey
Thailand
Spain
South
Korea
South Africa
Singapore
Russia
Malaysia
Indonesia
India
Germany
China
Canada
Brazil
Australia
The size of the circle represents the
relative banking assets (US$ 1,000 billion)
UK
France
Customer spread is much higher than NIM
4
3
2
1
0
Effective customer spread
(Yield on advances
yield on deposits)
3.55
2.55
Net Interest Margin
(NIM)
(%)
the industry to set high aspirations on composite metrics
of productivity. Such composite metrics have to
encompass human resources, technology, bad debt costs,
and customer service. Productivity excellence breaks the
compromise between undertaking businesses that are a
national priority and operating at reasonable margins at
the same time. For the Indian banking industry, this is an
obligation to the nation.
Productivity Excellence: Need of the
Hour
Beyond the strategic rationale for productivity excellence
articulated above, there are tactical reasons why
productivity excellence should be on top of any bank
CEOs agenda.
The emerging regulatory framework postcrisis will
require banks to keep higher levels of capital in future.
To deliver the same ROE on higher levels of equity,
banks will have to be able to generate higher profts
from the same assets. Higher productivity in sales,
service, operations, and bad debt management will be
crucial in achieving this.
Rising interest rates imply a pressure on bank profts
due to MarktoMarket (MTM) losses on investment
book. Productivity enhancement could compensate
for such loss of proftability and help sustain a steady
ROE.
The specter of economic slowdown in India always
looms large in the background. A rise in NPAs is
inevitable in such an environment and some uptick is
already being seen in NPA levels. Efective bad debt
management is crucial to maintaining proftability in
such a scenario.
Improving the efcacy of the regulatory transmission
mechanism is crucial for the RBI in its fght against
infation. As such, a discussion paper has been put out
on the possibility of deregulating the Savings Bank
(SB) interest rate. It is widely expected that once
deregulated, SB interest rate will go up because of
competition. Exhibit 1f depicts the potential impact of
SB rate increases on the ROE of banks. For every 1
percent increase in SB rate that cannot be passed onto
the customers, the ROE of banks will fall by 1.65
percent. Given the low credit oftake and a rising
Exhibit 1e. Bank systems with lower opex
tend to operate at lower NIMs
Sources: OECD data; IBA data; Austin Bank Brazil; Turkish Banking
Association; Central Banks of Malaysia, Singapore, Thailand and
Indonesia; BCG analysis.
Note: Weighted averages over the years 2005 to 2009. Indian data
for a year corresponds to year ending in March (e.g. April 2009 to
March 2010 corresponds to year 2009). For other countries the data
corresponds to the calendar years.
Exhibit 1f. SB rate deregulation will
necessitate productivity enhancement
Sources: IBA data; BCG analysis.
Note: Data for FY 10.
7
NIM (%)
3
2
1
0
0 1 2 3 7
Brazil
Indonesia
USA
South Africa
Thailand
China
South
Korea
Singapore
Spain
India
UK
Canada
Germany
France
Russia
Turkey
Malaysia
Australia
Opex / assets (%)
Every 1% SB rate hike (not passed to borrowers)
will reduce bank ROE by ~1.65% on average
1.5 5.5 4.5 3.5 2.5
SB rate increase over
FY 2010 savings bank rate (3.5%)
ROE (%)
15
10
0
5
0.5 0
14.1
13.3
11.7
10.1
8.4
6.7
5.0
interest rate scenario, it is highly likely that passing on
interest rate increases to the customers will not be
fully possible. In that case, the industry has to brace
itself with productivity enhancing measures to counter
the efect of higher SB rates.
Being Five Star in Productivity: Beyond
Traditional Notions
Banks have to embrace a composite notion of excellence
in productivity as shown in Exhibit 1g. This composite
notion goes beyond the traditional shop foor notion of
manpower productivity and has to cut across the silos of
sales, service, back ofce, collections, and head ofce. Our
study shows that Indian banks have to strive for excellence
in the following fve areas:
Branch sales and service excellence 1.
New channel excellence 2.
Lean operations and operating model 3.
Highperformance organization 4.
Bad debt management: proactive, preemptive, and 5.
preventive
The rest of this report is structured along these fve areas
of excellence, as illustrated in Exhibit 1h with one chapter
dedicated to each. Each chapter highlights the current
status of Indian banks in the relevant area, compares
Indian industry with international benchmarks where
applicable, and highlights a broad roadmap toward
excellence that banks can pursue.
Excellence in each area earns the bank a Star and those
banks who master each of the 5 distinct areas of
productivity will deserve to be called the Five Star
banks in the industry.
The FIBAC survey analysis has revealed significant
diference between banks on a host of metrics relevant to
each of these fve dimensions. Clearly, diferent banks
have achieved excellence in diferent areas. Banks need
to evaluate where they stand in each dimension and chart
out an action plan to achieve Five Star status.
A composite notion of bank productivity
Exhibit 1g lays out the simple driver tree that illustrates the
linkage of various levers to the ultimate goal of Return on
Equity (ROE) for the bank. Net Interest Income (NII) and
fee income add up to form total revenue of the bank, which,
net of Operating Expenses (Opex), bad debt charge, and
tax, leads to the Proft Afer Tax (PAT) for the bank. PAT per
unit of asset leads to Return on Assets (ROA). A banks ROE
is (leverage + 1) times its ROA. For this study, the impact of
leverage has not been detailed. This is partly because
leverage in Indian banks is largely controlled by regulations.
Some banks that maintain high leverage do so for
extraneous reasons that are not relevant to a discussion on
bank productivity.
A bank with high productivity can generate the same ROA
(as a bank with low productivity) even while operating at a
lower NII. It can achieve this by increasing fee income per
unit of asset, reducing the opex per unit of asset, or reducing
bad debt charge to P&L per unit of asset on its balance
sheet. This is the composite notion of bank productivity.
How does one create / generate more fees from the same
asset through higher sales efectiveness? How does one
reduce the cost of operation while maintaining the same
level of customer service? And how does one reduce the
cost of bad debt even while taking risks in lending?
Exhibit 1g. Bank proftability driver tree
+
Return on
average
equity
Net
interest
income
Fee
(Bad debt
charge)
(Operating
expenses)
(Tax)
Leverage
+ 1
Return on
average
assets
Assets
Profit
after
tax
Exhibit 1h. Being Five Star in productivity excellence
Branch sales and
service excellence
New channel
excellence
High performance
organization design
Lean operations and
operating model
Bad debt
management
and preventive
preemptive, proactive,
Productivity
excellence
G
lobally, the primacy of branches as the
principal channel for banking has been
reinforced by the afermath of the banking
crisis. The importance of retail deposits in
bank portfolios has gone up signifcantly.
Bank branches are the primary vehicles to mobilize retail
deposits. The benchmarking survey of banks in India has
shown high variability in the productivity of branches in
attracting savings customers. Exhibit 2a shows the average
number of savings accounts opened in FY 2011 per
branch in metro and urban areas by various banks. On an
average, banks opened about 1,100 accounts per branch
in metro and urban areas. While the new private sector
segment has a high median, large public sector banks are
not far behind. Actually, the bank with the best
performance on this metric is a foreign bank followed by
a large public sector bank. Old private sector and
mediumsized PSU banks have lower new accounts per
branch, refecting the insufcient network efect created
by smaller branch networks. However, some small banks
have demonstrated how to counter the network efect
and acquire as many new customers per branch as banks
with large networks. Our study has highlighted four key
areas of intervention to turbocharge business growth
through branches.
Redefine Role of Branches and Roles
Within Branches
The mostefcient business models are those that ensure
that the maximum proportion of staf is customerfacing.
The best that we have observed internationally is 82
percent of bank staff deployed in customerfacing
activities. The median observed is 71 percent. The
majority of these employees are in branches in sales or
service roles.
Exhibit 2b highlights the composition of customerfacing
staff, as mentioned by different Indian banks in the
productivity benchmarking survey.
In India, on an average, about 62 percent of banks total
staf is deployed in customerfacing activities. Out of this,
roughly 37 percent are branch staf deployed in customer
service with 18 percent being branch staf deployed in
sales, 6 percent working in mobile outbound sales force,
and 1 percent staf serving in customerfacing channels
like call centre and the internet.
Exhibit 2a. Branch sales effectiveness
Number of SB accounts opened per year per
branch in metro / urban branches
Sources: FIBAC Productivity Survey 2011; BCG analysis.
Better never than late
George Bernard Shaw
Branch Sales and Service
Excellence
1,000
1,500
5,000
Number of savings bank accounts opened /
metro and urban branch
500
1,098
Private
(Old)
PSU
(Large)
PSU
(Medium)
Foreign Private
(New)
0
India industry average
1,768
1,846
1,779
4,696
1,297
879
1,284
885
1,349 1,332
328
661
245 274
876
Median Low High Average
2,000
Clearly, branches are where the maximum number of
customerfacing staf sits. In customerfacing roles, the
62 percent staf available is still less than equivalent
median international benchmark of 71 percent observed
by BCG. Among the banks in India, the new private sector
has deployed the highest proportion (73 percent) of staf
in customerfacing roles. The corresponding figure
applicable to public sector and old private sector banks is
less at around 60 percent. This is primarily because a
lower proportion of branch staf is deployed in customer
facing sales or service roles in the public sector and the
old private sector. Foreign banks stand out with a large
portion of their total staf strength deployed in mobile
outbound sales. This is perhaps to compensate for their
fewer branches.
The primary imperative for deployment of maximum
staf in customerfacing roles is to restructure branches
and the roles of staf in branches. Exhibit 2c illustrates the
composition of branch staf in diferent banks into sales,
service, and backofce roles as mentioned by the banks
in the survey. About 2530 percent of staf is deployed in
backofce activities in branches in public sector and old
private sector banks. Should this proportion be reduced
through appropriate Business Process Reengineering
(BPR), the efcacy of branches to generate more business
would go up.
Many banks maintain traditional role defnitions or job
cards for branch staf. These role defnitions have not been
updated even afer the latest technology has been adopted
in branches. In BCGs experience, the role of each
individual member in the branch has to be defned by
such measures as time to be spent in sales, service, or
other activities. Actual time spent by each employee has
to be documented through time and motion studies to
fnetune the allocation. Exhibit 2d illustrates the results
of one such time and motion study. The actual time spent
on various activities by each of the 10 staf in the branch
has been captured. Note that sales staf, in this case, are
only able to spend about 4050 percent of their time on
sales. Similarly, service staf fnally spent just about 4050
percent of the time really on service. While the numbers
stated in Exhibit 2b and 2c are as per the claims made by
the banks in the survey, our experience suggests that the
real time spent on customerfacing activities ends up
being much lower than what was originally designed.
Banks have to undertake a rolebyrole study, in a
Exhibit 2b. Front office model
62% staff on sales and service
Sources: FIBAC Productivity Survey 2011; BCG RBPPB 2010; BCG analysis.
Note: FTE = Full Time Employee
100
60
80
40
20
0
PSU Private
(Old)
Private
(New)
Foreign
Sales and service FTE / total FTE (%)
Branch FTE on sales
Outbound sales force Inhouse
Call centre and internet service FTE
Outbound sales force Captive Subsidiary
Branch FTE on service
60
40
17
61
39
20
73
24
21
20
5
70
17
10
26
16
Global median Global best India industry average
71
82
62
practical branch context, to fnetune their role defnitions
and do further business process reengineering to increase
the available time for sales and service in branches.
The discussion on the role of branches is incomplete
without discussing the role of the branch manager. With
technology allowing centralization of many decisions,
branch managers are ofen lef to execute tasks rather
than to assume the role of the CEO of a local business. In
BCG experience, empowering the branch manager leads
to signifcant improvement in branch productivity. Branch
managers have to be encouraged to develop their
strategies within the context of the business and the
competition existing in the branch catchment area. Banks
have to carefully evaluate the decision rights of the
branch manager to ensure that he / she has sufcient
control over his / her resources and fexibility in making
decisions.
Redesign of the Branch for the Next
Generation
The branch with focus on sales and service looks quite
diferent from a traditional branch. Not only are role
Exhibit 2c. Branch time allocation
Exhibit 2d. Optimizing branch time on sales and service
Illustrative example from BCG project experience
Sources: BCG project experience; Time & Motion study.
PSU Private
(Old)
Private
(New)
Foreign
23
54
23
28
48
24
45
50
33
56
10
0
20
60
40
80
100
% of branch FTE
Sales
Service
Branch time allocation
4
Back
office
Breakdown of time spent
Others
Break
HR activities
Admin and risk
Sales Other
Sales Customer facing
Nonmonetary transactions
Monetary transactions
Branch
manager
Sales and
service
manager
Counter
supervisor
Business
banking
advisor
Mortgage
reviewer
Mortgage
advisor
Banking
advisor
Help and
advice
Cash
teller
Customer
advisor
0
100
60
40
20
80
Service staff Sales staff Management staff
Role
Time (%)
21
10
14
12
6
10
6 6 5
7 7
5
16
9
38
10
26
5
39
39
6
8
13
8
10
8
10
10
13
40
12
7
41
26
7
11
10
5
23
45
8
12
38
11
21
10
8
13
48
8
8
11
38
31
7
5
37
34
13
3
3
3
3
definitions of staff based on customer (rather than
process or productbased job defnitions), the layout of
branch and space allocation also has to reflect the
branchs new customercentric role. Exhibit 2e illustrates
the average size of branches in metro areas for Indian
banks. There is a wide variation in size of branches of
diferent banks. The average size of branches of public
sector banks is larger. With appropriate process and role
redesign, this should mean more space for customers for
wait time and consultations. The private sector is
adopting a small branch strategy. This helps with lower
branch costs, and hence, faster branch breakeven. For
banks adopting rapid rollout of new branches, this is
quite helpful economically. Exhibit 2e also illustrates the
average wait time in branches in India. Of the 40 banks
polled for this survey, about 26 percent mentioned 25
minutes as the average wait time in their branches.
About 65 percent banks mentioned 515 minutes. BCGs
global benchmarking of retail banks showed a median
branch wait time of 4 minutes with the best being 2.2
minutes. Clearly, service levels in branches can be
improved with further business process reengineering
and role restructuring, as illustrated in the previous
section.
Introduce Structured Sales Processes
Introduction of best practices in sales management is the
most important lever to enhance branch productivity.
There are several practices that have been observed.
Filling the diaries of sales staf
Many organizations believe that asking people to sell and
freeing up their time to meet customers is enough to push
up sales. Sales staf, in such cases, is typically lef to fend
for itself. BCGs research and project experience have
shown that this is hardly enough. The primary lever to
enhance sales is ensuring that the sales staf meets as
many potential customers as physically feasible. For this,
the bank has to have a robust lead generation and
allocation mechanism. Sales staf has to be allocated
leads. The diaries of sales staf have to be flled one week
in advance. CRM systems that predict customer purchase
propensity have to be developed to mine existing
customer database for leads.
In a fastgrowing economy like India with young
demographics, many new potential customers are added
every day and they form an even bigger source of leads.
Exhibit 2e. Design of branch space and processes
More branch space has to be allocated to customers; processes redesigned to reduce TAT
Sources: FIBAC Productivity Survey 2011; BCG report Operational Excellence in Retail Banking How to Become an AllStar; BCG analysis.
1
Wait time for average teller transaction at a branch in CP area in Delhi is used for comparison.
515 mins
25 mins
>15 mins
Median
(4.0 mins)
Worst
(12.5 mins)
Best
(2.2 mins)
60
100
% of banks
20
Total
0
Sample of international
retail banks
80
40
Wait time in branch
1
9
65
26
Average size of branch in metro areas
9,000
1,000
2,282
0
4,000
2,000
Average branch size (square feet)
Private
(Old)
PSU Foreign Private
(New)
3,000
3,000
2,023 2,095
8,500
1,366
1,500
1,250
1,800
1,881
1,712
4,600
2,178
Quality of sales
Sales units typically get too focused on meeting their
numbers and, in the process, the quality of sales sufers.
We have observed that certain practices enhance the
probability of sale in a meeting and also the quality of
business thereafer. Leads pursued by sales staf have to
be prequalifed with a prior telephone call. It enhances
the conversion rate. Sales staf has to be trained in having
conversational selling with customers wherein customer
need is investigated rather than a product being pushed.
Customer onboarding
Customers are most receptive to suggestions from the
bank in the frst few months afer opening an account.
Afer that, calls from the bank are not as welcome. Best
practice sales process requires that in the frst few months
the customer is signed up and trained to use all alternate
channels including internet, bill pay, Point of Sale (POS)
payments and other convenient and associated oferings.
Customers also provide invaluable feedback in this time
frame. Banks that listen carefully to customers in this
time frame can get useful insights on areas for
improvement. Most importantly, customers who have
been onboarded well are typically more likely to stick
around compared with others.
Resourcing aligned to potential
Ofen the number of resources is not in line with the
potential in the catchment area of a branch. This oversight
happens either because of paucity of resources or because
of lack of tools to measure potential in branch catchments.
Banks should develop such tools.
Simplicity in targets
Banks ofen give many targets to branches. Sometimes
the list of targets for a branch manager could be as high
as 6090. Individual sales staf is also given many product
targets to meet. This is ofen counterproductive. Not
everyone is good at selling all products and not every
catchment has potential for all products. Giving sales staf
targets to sell from a composite basket of products based
on a point system has been found to be more efective.
Setting in place an operating rhythm
Many banks claim to have trained their branch staf on
new sales processes but fail to get the benefts in higher
sales productivity. BCG studies have shown that branch
sales practices get institutionalized only if an appropriate
operating rhythm is established in the branches. Such
rhythm entails a disciplined daily, weekly, and monthly
schedule. Rhythms take time to set in. Banks have to
ensure that top management oversight and push stays for
the appropriate duration to see to it that the rhythm is
irreversibly set in place.
The managerial valueadd of the regional
ofce
There are ofen several layers of administrative oversight
on the branches. Quite often, these layers end up
aggregating the branch numbers and following up on the
results. BCG experience has shown that if the layers were
to focus on inputs (lead generation, quality of sales
process, operating rhythm, etc.) as much as on outputs
(fnal sales fgures), the performance will be much better.
The regional ofce should establish an operating rhythm
to review the branch network on process inputs. The
Management Information System (MIS) has to be
redesigned to have not just fnal sales fgures, but metrics
refecting the sales process leading to fnal deal closure
as well.
Exhibit 2f illustrates the extent of closure and dormancy
of accounts in SB in Indian banks. While at an overall
Exhibit 2f. Quality of growth
Savings accounts
Sources: FIBAC Productivity Survey 2011; BCG RBPPB 2010; BCG
analysis.
20
30
5
3.0
Private
(Old)
PSU Foreign Private
(New)
0
5.6
Global median
15
10
58% 53% 63% 55%
Savings accounts closed in FY11 /
savings accounts as on March 31, 2010 (%)
Active savings accounts (%) XX
9.5
28.2
22.5
2.5
2.4
1.8
9.4
18.1
0.1 1.0
6.7
15.9
level, account closure observed in India is lower than
median closure observed internationally, there is still a
very high variation across banks, and in some cases
closure is as high as 2030 percent. Ofen, the account is
not closed but the customer becomes dormant. This is
another leakage in the banks productivity. Old private
sector banks have reported account dormancy levels as
high as 47 percent. Public sector banks and foreign banks
dont fare much better either. With improvement in
quality of sales through practices enunciated above, the
wastage of churn and dormancy can be avoided and
banks can become more productive.
Simplify Product Portfolio
Banks often create a large number of schemes and
product variants in the mistaken belief that this helps in
meeting customer needs better. BCGs experience has
shown that, on the contrary, a large product portfolio
creates complexity for the sales staff, reducing its
effectiveness. Exhibit 2g illustrates the number of
products in deposits and retail advances which banks in
India ofer. Like elsewhere, there is a wide variation, with
some banks ofering as many as 200 schemes. The median
value, at around 55, is close to what BCG observed in a
global benchmarking of retail banks. The best practice is
to establish a rigorous process of periodically simplifying
the product portfolio. Simplicity of the portfolio makes
the sales process more efcient and the branch staf more
productive. We observed that the best practice in one of
the international banks was to restrict the portfolio of
products in deposits and retail credit to 19.
Public Sector Needs to Build Investment
Advisory Capability
Exhibit 2h illustrates the income from sales of insurance
and mutual funds for a bank as a percentage of SB
balance of the bank. The idea being that SB balance
accounts for the customer base to which feebased
advisory services are sold. As is clear from the chart, the
majority of the public sector banks which collectively
account for about 70 percent market share in deposits are
virtually absent from the advisory space. The major share
of this market is captured by foreign banks, followed by
the new private sector banks. Public sector banks have to
develop offerings for wealth management advisory
services for their customers. It is a natural product to ofer
Exhibit 2g. Simplicity of product portfolio
Deposit
1
and retail credit product
Sources: FIBAC Productivity Survey 2011; BCG RBPPB 2010; BCG
analysis.
1
Savings, current and term deposit.
Exhibit 2h. Branches can deliver higher
fee income
200
50
55
0
19
Global best
150
100
Number of products
Private
(Old)
PSU
(Large)
PSU
(Medium)
Foreign Private
(New)
95
136
192
195
45
18
34
22
37
18
41
58
75
96
32
Median Low
Income from sale of insurance and mutual funds /
total savings bank balance (%)
3.0
0
2.0
1.5
Private
(Old)
PSU Foreign Private
(New)
2.5
0.5
2.86
2.21
0.55
0.22
High Average
0.83
2.39
1.84
0.42
0.21
0.09
0.01
0.07
from the branch network as it requires consultations in
the trusted and secure environs of a bank branch. Further,
with growing income and wealth levels among customers,
investment advisory is a mandatory product for banks to
ofer. Generating the maximum fee income from the
branch network is crucial to productivity excellence in
banks. Public sector will be exposing itself to threat of
customer attrition in future if this genuine need of
customers is not fulflled properly.
I
n last 4 years, the number of ATM transactions
increased three times from about 1,500 million to
about 4,200 million. Such explosive growth in the
usage of new channels is going to characterize the
next decade of Indian banking in the same way as
rapid growth in retail lending did in the last decade. This
trend ofers a whole range of opportunities for Indian
banks to diferentiate themselves, to improve customer
service, to generate new leads for sales, and to reduce
costs. The productivity survey revealed that many banks
may not be ready to harness this opportunity.
Embrace the Mobile
Five alternate channels for transactions ATM, internet,
mobile, call centre, and POS, have all reached critical mass
in the Indian market and are poised for rapid development
in terms of depth of penetration and breadth / quality of
service. Mobile phones lead the evolution by far. Exhibit 3a
captures how the face of Indian banking will change during
the next decade. It shows the percentage composition of
transaction volumes by channel in 2003, 2010, and as
projected for 2020. Cash and cheque, which dominate the
The best way to predict the future
is to create it
Peter Drucker
Exhibit 3a. Banking will not be the same
Transaction profile of India is expected to dramatically change
Sources: FIBAC Productivity Survey 2011; RBI reports; Central banks of Germany,
US and South Korea; World Bank population data; The Mobile Financial
Services Development Report by World Economic forum in collaboration with
BCG; BCG analysis.
1
Direct tax code.
2
Goods and services tax.
New Channel Excellence
% share of banking channels
100
0
60
20
80
2020 (base) 2010 2003 2020 (optimistic)
40
94
49
42
9
13
7
7
45
16
13
21
14
6
32
13
Mobile other
Mobile POS
Online
POS (card)
ATM cards
Call centre
Cash and cheque
~65% financial
inclusion
~45% Financial
inclusion
~30% financial
inclusion
~
Adoption of
R
Promotion of low cost NPCI interbank switch (RuPay)
80% financial inclusion
Aadhar and direct credit of subsidy
egulations to encourage mobile transactions
Rigorous implementation of DTC and GST
Channel innovations by banks
Adoption of smart phone technology and 3G
1 2
POS payment by mobile

P2P remittance / transfer
Ticket bookings
Mobile top-ups
Insurance premiums
Cash management
instructions (business)
Bill and utility payments
Shopping on mobile
Government payouts
transaction profile at present with 49 percent of
transactions, are expected to go down to 15 percent. Mobile
banking which constitutes just about 0.1 percent of
transactions will be the second largest channel afer ATM
(in the base case scenario). A signifcant proportion (2030
percent of total) of transactions could happen via mobile
phones by 2020 in optimistic scenario if a number of
industry, regulatory, and government initiatives were to
fructify.
Indian banking will chart a diferent evolutionary course
compared with other developed economies which evolved
and matured at a time when mobile technology was not
yet ready. Mobile technology will impact banking
transactions in many waves:
Online banking on mobile
Customers will be allowed access to account on mobile
phone. Beyond information access, transactions like bill
pay, accounttoaccount funds transfer, and service
requests will be feasible. Such mobile banking will replace
online banking because of greater convenience that will
induce new users, who do not have regular access to the
internet, to adopt mobile banking.
Mobile commerce acceptance
Smartphone technology is making the device quite
versatile. With a few attachments, it can act as a Point of
Sale (POS) device for accepting payments. This can
revolutionize POS debit and credit card acceptances. The
primary barrier to rapid growth of POS debit (or credit) is
the high setup cost for a conventional POS device. With a
mobile phone morphing into such a device, this barrier
will fall.
Mobile commerce payments
Innovation in mobilephone technology is taking place at
a rapid pace. It is conceivable that within next few years
we will have cheap enough phones with Near Field
Communication (NFC) technology built in to facilitate
PeertoPeer (P2P) money transfer almost instantaneously.
At this stage it is also conceivable that most of the payers
at POS will be using mobile phones instead of cards to
make payments. Many small daily P2P transactions like
payments to sundry vendors will move from cash to mobile
phone.
Given that mobile transactions cost a fraction of ATM or
branch transaction, the enormous productivity
enhancement that will accrue to banking system can
hardly be overemphasized.
Exhibit 3a depicts an optimistic scenario that we argue is
worth a concerted efort by industry, government and RBI.
It envisages a scenario of 80 percent fnancial inclusion in
India with bank accounts opened for vast majority and
serviced proftably leveraging the low cost advantage of
new channels especially mobile which is accessed by
more poor people than any other channel. Industry has to
invest in innovation now. Government has to ensure that
well intentioned initiatives like Aadhar, direct credit of
subsidies to benefciaries, Direct Tax Code (DTC), and
Goods and Service Tax (GST) are implemented in right
earnest. They will reduce the need for / avenues for black
money transactions and bring large number of small
transactions into the books of banking industry.
If low cost channels are made available by the banking
industry, a large portion of these transactions will move to
the lowest cost channel principally to the mobile phone.
Low cost interbank payments and settlement utility
promoted by NPCI (RuPay) will provide the crucial
infrastructure for mobile transactions being projected.
Lastly, RBI has a crucial role to play. Regulation in this case
has to encourage and facilitate innovation, not just permit
experimentation. If conventional players do not do enough
to invest in innovation, new players with specialized
licenses may be considered.
Leverage New Channels for Productivity
Enhancement
New channels enhance bank productivity in four ways:
Decrease cost to serve: Cost of transaction in new
channels is much lower compared to equivalent
transaction at a branch. By encouraging customers to
use new channels, banks can reduce the total cost to
serve them. Minimum viable ticket size of business can
be reduced and more customers can be profitably
served.
Reduce customer churn: It has been found that once
customers get used to the multichannel transaction
experience, chances of churn are substantially reduced.
This is specifcally true of highconvenience services
such as online payments and bill pay which have a
signifcant setup efort and hence, high switching cost.
Further, fve channels ofer banks a whole new range of
customer touchpoints where there is possibility of
diferentiation.
Increase crosssell: New channels offer customer
touchpoints that can be used to generate new leads
from existing customers. ATM is a powerful source of
new leads from existing customers.
Increase new client acquisition: New channels
especially internet are used for prepurchase
information gathering and product comparison. Social
media is expected to be an important channel for brand
building and referral. For some banks, as many as 50
percent of hits on their ATM are of noncustomers.
Clearly it is a major opportunity for new leads.
It is clear that for both revenue uplif and cost containment,
new channels will be at the center stage of bank
productivity enhancement initiatives.
Ensure Adoption: Get Over the Hump
Like most things that require a change in consumer habit,
the biggest challenge for banks in new channels is ensuring
adoption. Exhibit 3b illustrates the percentage of active
savings accounts that have had at least one transaction
through ATM, debit card at POS, internet, or mobile phone.
Despite the massive increase in ATM transactions
witnessed lately, just about 54 percent of active savings
accounts had an ATM transaction in the last six months in
metro areas. For nonmetro areas, the number was much
lower at 33 percent. The adoption rates for POS debit,
online, and mobile were lower at 30 percent, 15 percent,
and 2 percent, respectively, in metro areas.
Beyond a tipping point, however, adoption increases at a
rapid pace. The explosive growth in the number of ATM
transactions in the last 23 years is a testimony to, as well
as, a sneak preview of what is to come. The moot point is
how to get customers to try the new channel and
experience the new convenience and liberation it ofers.
Banks have to roll out concerted campaigns to induce
trials. Many international banks do not give full marks to
their sales force for new customer accounts unless all the
new channels have been used at least once. Customer
onboarding process deployed in the frst 36 months of
an account opened is crucial. Rewards programs can be
ofered to customers to motivate usage of new channels.
For mobile applications, employees have to be trained to
help customers download the banks applications onto
their mobile devices and also to help them overcome
the inevitable teething troubles of getting started. Most
banks in India do not have such processes or programs in
place. They should anticipate the upcoming revolution
and put these systems in place.
A basic necessity in growing adoption is ensuring a
delightful customer experience. Banks have a lot of
ground to cover here. A recent survey of retail banking
customers conducted by BCG has revealed that new
channels are primary sources of customer dissatisfaction.
Exhibit 3c illustrates select aspects of service on new
channels in India. Bank call centres have gained notoriety
for long wait times and the complexity of Interactive Voice
Response (IVR) navigation. Almost 40 percent of banks in
India revealed in the productivity survey that their wait
time was more than a minute at the call centre. The
median observed in leading retail banks worldwide is 48
seconds. About 25 percent of total customer complaints
that reach the ombudsman are for card products that
relate to new channels.
Exhibit 3b. New channel usage in India
SB accounts activity
1
details
1
Accounts with more than 1 customer initiated transaction over the
past 6 months.
40
60
% of active savings bank accounts
20
0
Active
debit
card
Active
ATM
card
Active
mobile
banking
Active
internet
banking
54
33
30
12
15
4
2
1
Nonmetro branches Metro branches
Extract Full Potential of ATMs
ATM usage has exploded in the last few years. However,
we are nowhere close to maturity of the channel yet.
Even as the number of ATMs rose in the last few years,
the number of transactions per ATM rose even faster.
From about 70,000 at present, we expect the number of
ATMs to expand to about 250,000 by 2020. Banks have
achieved varied levels of success with ATM adoption and
migration of transactions. Exhibit 3d illustrates the
number of cash withdrawal transactions per ATM for
banks in diferent categories. A few banks in each category
have achieved very high levels of transactions (200
transactions per day per ATM, which is close to the
highest in the world). There is no scale evident in the
level of usage in ATM network. A few banks with small
networks are as successful as a few banks with large
networks in achieving high usage. The most successful
public sector bank is as successful as the most successful
bank in the private sector. There is an interesting pattern,
however, in the usage of a banks ATM by nonbank
customers. More than half of the transactions on ATMs of
new private sector banks are from customers of other
banks. For large public sector banks, this number is just
Exhibit 3c. Customer service in new channels
Sources: FIBAC Productivity Survey 2011; RBI data; BCG report Operational excellence in retail banking How to become an All Star; BCG analysis.
Note: The RBI data on complaints received at banking ombudsman offices for the year 20092010.
Exhibit 3d. ATM utilization
Number of cash withdrawal hits per ATM per day
Call centre wait times
13 mins
< 30 sec
30 sec
1 min
> 3 mins
Median
(48 sec)
Worst
(2.3 mins)
Best
(24 sec)
60
100
% of banks
20
Indian banks
0
80
40
Sample of international
retail banks
20
30
40
% of card complaints at ombudsman
10
24%
PSU
(Large)
Private
(New)
Foreign Private
(Old)
PSU
(Medium)
0
38
26
22
17
9
ATM, debit and credit cards account for
significant percent of complaints
39
17
22
22
200
250
50
160
0
150
100
Own customer /
other customer
1.28 2.64 1.30 0.84 0.90
XX
Private
(Old)
PSU
(Large)
PSU
(Medium)
Foreign Private
(New)
Number of cash withdrawal hits per ATM per day
244
219
214
184
117
52
118
65
37
97
133
184
118
139
109
about a quarter. Some new private sector banks are
known for their ATMs as a primary vehicle of service.
This is a simple yet powerful fact. ATMs, located
strategically, managed with high uptime, and maintained
in pleasing ambience, can be a rich touchpoint with new
customers and can potentially generate leads for
customer acquisition. ATM networks can be used to
extend the catchment area of branches. They can also
enhance the perception of a banks presence even when
it has only a limited number of branches.
There is signifcant scope for higher quality, more breadth,
and greater customer delight in the ATMs. Banks that
invest now could reap the benefts in terms of customer
satisfaction and new acquisitions. Making deposits at
ATMs can be made more intuitive and safe. Privacy of
transactions can be improved. There is signifcant scope
for personalization of interaction and generating leads
from customers for new products.
Be the New Channel Champion Who
will win the next battle in Indian
banking?
New private sector banks gained an upper hand in Indian
banking landscape when they entered the market against
the incumbent public sector banks with core banking
technology, internet banking, and ATMs. In the last
decade, almost all of the public sector banks have
completed the implementation of core banking systems.
ATM and internet banking have been put in place. Most
banks have launched some form of a mobile banking
platform. The early lead of new private sector banks has
now been leveled at least in terms of what is being
ofered. The stage is now set for the next battle in retail
banking. This will be characterized by massive adoption
and proliferation of new channels as measured by
depth and breadth of usage by customers. Odds are even.
Most banks have a fair chance of establishing a lead in
the next battle for Indian consumers.
Even as the banks are busy catching up with massive
growth, they have to set aside resources to contemplate,
pilot, and fnetune the channels and services for the
future. There are many areas that need investigation, e.g.:
Is the bank investing in nextgeneration mobile
banking applications? Such investments have to be
made in advance in anticipation of the three waves in
usage of mobile phones for banking online banking
on mobile, usage of mobile phone on POS for
acceptance, and P2P payments on mobile phones.
The advent of 3G in mobile telephony in India can
open many avenues for richer service delivery. Priority
customers, who are otherwise not viable for a
dedicated relationship manager, can get face to face
fnancial planning advice on their mobile devices from
a set of centrally located advisors.
ATMs are likely to continue to be installed at a rapid
pace for the next several years in India. Those banks
which have a strategy in place to use ATMs as customer
acquisition tools as much as lowcost transaction tools
will gain an edge. What additional services and
diferentiated experience is the bank planning to ofer
through its ATM?
Presence on social media can be a powerful source of
branding, customer acquisition, and generating
feedback from young customers who will be critical
for growth. What is banks presence on social media?
Adoption of existing channels by the current customer
base has to be tracked and worked upon as a strategic
initiative. This will require investment in customer
education and trial induction. Customer onboarding
processes have to be put in place.
New channels will be a primary driver of productivity
enhancement in Indian banks in the next decade. Success
will depend on initiatives taken by the banks now.
N
on customerfacing activities of the bank
have to be optimized in a manner that
these take the least amount of time and
resources but maintain the desired levels
of customer service, fexibility, and control
over risks. After sales and service, the next highest
number of employees are engaged in backoffice
operations and that should be the first priority for
optimization.
Exhibit 4a illustrates the level of operations staff in
various banks in India. The exhibit shows the operations
staff split into branchbased staff and centralized
processing unitbased staf. The average proportion of
FTEs in backofce operations in India, according to the
productivity benchmarking survey of Indian banks, is
about 19 percent. This is similar to the median of the
global sample. Like elsewhere, there is a broad range
among the banks in India. Some banks have as high 40
percent staf in back ofce processing. They need urgent
correction. New private sector banks and foreign banks,
in general, are below the average. Only a handful of
banks are close to the global bestpractice benchmark of
10 percent.
Another measure of productivity is the extent to which
the backofce staf is based out of dedicated processing
centres as against branches. On this dimension, the public
sector and old private sector banks have significant
ground to cover with the majority of their back ofce staf
still working out of the branches. A signifcant portion of
the backofce staf of new private sector and foreign
banks is in the processing centres.
The third measure of productivity is the extent of scale in
the backoffice processing centres. The bubbles in
Exhibit 4a at the bottom of the bars depict the average
size of backofce processing centres (average number of
FTE per backofce processing centre). On this count, the
industry has some ground to cover average size of
backofce processing centres in India range from 1550.
The global benchmark observed by BCG is a median of
250 staf per processing centre. The number observed in
a sample of 20 global retail banks is 760 FTE per centre.
Centralization of processes is sometimes blamed for poor
customer service. This is a failure of centralization. In
Exhibit 4a. Composition of operations staff
(Branch back office + processing centre) / total
Note: Processing centre staff includes staff in data centres and
processing units; Total staff includes the captive subsidiary staff
There is nothing so useless as doing efciently
that which should not be done at all
Peter Drucker
Lean Operations and
Operating Model
45
15
0
Global median
30
13.3 16.1 12.0 17.3
(%)
Private
(Old)
PSU
(Large)
PSU
(Medium)
Foreign Private
(New)
47.2
Branch based back office staff
Processing centre staff
Global best
Average size of back office processing centres (# FTE) XX
3.0
39.3
38.1
22.4
20.3
4.1 4.5 8.9
12.9
11.4 6.4 11.3
8.3
11.5
40.5
23.8
11.8
22.1
3.9
3.5
23
10
19
BCGs experience, such failures can be avoided by
adopting two principles:
Create lean processes through customercentric BPR 1.
Align operating models to the business units 2.
Create Lean Processes Through
Customercentric BPR
Process reengineering based on principles of lean design
should lead to simultaneous lowering of costs,
improvement in customer service, higher quality, and
reduction in risks. BPR must be customercentric. It
should break the compromises between process cost and
customer service to avoid failures of the type discussed
above. Exhibit 4b is an example of successful redesign of
a loan sanction process in the Indian market. A redesigned
Lean process is created by reducing non customervalue
adding activities in the traditional process. Such non
valueadding activities include too many handovers
between employees, involvement of more employees
than required, unnecessary physical movement of papers,
repetition of checks and reviews, redundant client contact
points, and more system inputs than the minimum
necessary. As shown in Exhibit 4b, a critical examination
of current process with an objective to identify wastage
led to more than 50 percent reduction in Turn Around
Time (TAT) for customers and more than 50 percent
reduction in rework resulting in higher employee
productivity. Less number of handovers and system
inputs means lower chances of error and reduced
operating risks.
Analysis of the TAT claimed by the banks in the
productivity survey highlights the room for further
process improvement in the Indian industry. Exhibit 4c
compares the TAT from mortgage application to sanction
in the Indian banking industry with a sample of large
global retail banks. A mere 17 percent of banks in India
claim to ofer sanction within 13 days of submission of
application. 83 percent need more than three days. On
the other hand, 55 percent of the leading international
retail banks in the sample claimed to ofer conditional
sanction within the same day.
There is significant room for further BPR in Indian
banking. Exhibit 4d highlights the percentage of banks in
Exhibit 4b. New vocabulary in process excellence
Reduce TAT for customers, increase productivity of employees, and reduce operating risks
Source: BCG project experience.
Note: TAT = Turn Around Time.
Number
of system
inputs
17 13
Inter
departmental
movement of
documents
12 3
Turn
Around Time
(TAT)
20 days 5 days Rework 40% 15%
Redesigned
lean process
Old
process
Redesigned
lean process
26 17
Number of
handovers
10 5
Number of
reviews /
checks

Old
process
Employees
involved
20 14
Client
contact
moments
7 5

diferent categories where at least 25 percent of branches
have fve key branch processes centralized or redesigned
(inward and outward clearing, account opening, cheque
book issuance, and adoption of a singlewindow system).
New private sector banks have had a head start because
these did not have legacy processes to redesign. The old
private sector is lagging behind the most in adopting
process reengineering, followed by the smaller public
sector banks.
Align Operating Models to the Business
Units
Processes should be redesigned and optimized in each
Business Units (BU) based on endtoend appreciation
of business model and economics. Value from operations
BPR may come if redesign in operations is complemented
with appropriate change in organization design and IT
platforms. Further, priorities vary among BUs. Exhibit
4e illustrates the diferences in priorities between a
retail bank, a corporate bank, and a transaction bank on
operations process model, organization processes, and
implications for IT platform. For the retail bank,
standardization, centralization, and consolidation of
Exhibit 4c. Turn Around Time
Sources: FIBAC Productivity Survey 2011; BCG report Operational
Excellence in Retail Banking How to become an All Star; BCG
analysis.
Exhibit 4d. Extent of Business Process Reengineering
Note: As claimed by banks in FIBAC Productivity Survey 2011.
Time taken from mortgage
application to sanction
0
100
80
60
40
20
< 1 hour
Same day
13 days
> 3 days
15
40
15
17
83
Indian banks Sample of
international banks
% of banks
30
Processes reengineered
Percentage of banks with at least 25% of
the branches adopting redesigned processes
Inward clearing centralized
Outward clearing centralized
Account opening centralized
Cheque book issuance centralized
Single window system in branch
50
75
100
% of banks
25
26
PSU
(Large)
Private
(New)
Foreign Private
(Old)
PSU
(Medium)
0
100
80
17
11
0
backofce processes are key success factors. BPR has to
focus on them. It leads to the need for redesign of
organizational processes in the form of the interaction
mechanism between BUs and backofce factories for
smooth handover and coordination of customer
interactions. In this context, the demand on IT is for a
high level of automation and low maintenance cost. The
exigencies are diferent in corporate banks. Centralization
of processes in corporate banks can lead to compromise
on customer service without any major cost savings. The
focus of process redesign in a corporate bank has to be
on creating synergies in operations processes among
diferent customer segments. The critical organization
process in a corporate bank is to create alignment
between product and customer segments to ensure a
seamless interface. Transaction banks, even though
similar to corporate banks, have diferent priorities from
corporate banks.
Significant Increase in IT Investment
Required in the Public Sector
Process excellence critically depends upon the quality of
the underlying technology platform. Most process changes
cannot be implemented without the appropriate upgrade
in technology. Almost all banks in India have achieved
close to 100 percent implementation of the Core Banking
System (CBS). What next? Banks should invest in
technology systems that can facilitate better decisions
through richer information capture, automate workfow
by eliminating paperwork, and help sales staf identify
leads to pursue. Exhibit 4f highlights fve such new areas
that require technology investment. The chart shows the
percentage of banks in various categories which claim to
have relevant investments in all the fve areas. The chart
highlights signifcant gaps in investments in technology,
irrespective of bank category.
Exhibit 4g corroborates this IT underinvestment in
fgures. The chart shows investment and expenditure on
IT as a percentage of revenues for various segments of
the Indian banking industry in FY 2011. On an average,
Indian banks spend about two percent of their revenues
on technology. The fgure is a bit higher for new private
sector banks, at four percent. BCGs survey of leading
European banks found that the median expenditure on
IT as a percentage of revenues in Europe was about nine
percent.
Exhibit 4e. Operating model needs meticulous design
Needs to be customized to business unit
Retail banking
Standardization and
industrialization
Corporate banking
Segmentation and
riskbased pricing
Transaction banking
Operations
process model
Standardization and
lean processes
Bundling of processes
across customer segments
Standard and
sophisticated processes
Organization
processes
Interfaces between
business and factories
Alignment of product
and customer units
Alignment of product
and customer units
Implication for
IT platform
Automation and low
maintenance cost
Integration of pricing
data and sales tools
Automation, scalability and
connectivity of platforms
Working capital and
network efficiency
Exhibit 4f. Next generation systems key to productivity enhancement
Source: FIBAC 2011 survey responses
It is improper to expect Indian banks IT spend to match
western banks due to diferences in cost of IT manpower.
However, the signifcant gap does merit investigation.
Public Sector Needs a New Strategy for
IT Investment Beyond CBS
The underinvestment in IT is most severe in public sector
banks. As depicted in Exhibit 4g, public sector lenders
spend about half of what their new private sector peers
spend on IT and less than a quarter of what comparable
Western banks do. To retain their competitiveness and
customer service levels, public sector banks will have to
ramp up their technology capability. This is one of the
biggest strategic priorities and challenges for the sector.
Implementation of the Core Banking System (CBS) was a
necessity and a given. It was in a sense a lowhanging
fruit that has been captured by all banks. Investments
beyond CBS are not a given. They need a careful
strategy.
IT strategy is required to create a coherent and
integrated IT architecture. Uncoordinated investments
Exhibit 4g. Investment in technology
Capital and operating expenses in IT / revenues
Sources: FIBAC Productivity Survey 2011; BCGs European IT
benchmarking in banking 2010; BCG analysis.
Next generation systems capabilities Percentage of banks with all ticks ( )
Systems allow for customer level view across
all products
Systems allow for return on capital assessment
on deals with customers
Data warehousing for risk management
modelling and customer relationship
management
Workflow automation in HR processes
Workflow automation in retail credit process
50
75
100
% of banks
25
Private
(Old and New)
Foreign PSU
0
67
27
17
4
10
(%)
2
2.7
Private
(Old)
PSU
(Large)
PSU
(Medium)
Private
(New)
0
9.6
European sample median
8.4
4.9
5.1
1.8
1.3
2.1
2.7
2.7
2.0
3.1
3.9
3.8
in technology by banks can, over time, lead to severe
complexity and costs. Western banks are laden with
huge costs of maintenance of legacy systems.
Investments made on a oneof basis lead to poor IT
architecture where systems do not integrate seamlessly.
Customer service sufers, the banks speed of response
decreases, fexibility to ofer new features reduces, and
operating risks increase.
Next generation investments in IT require stricter
measurement of Return on Investment (ROI). BCGs
project experience has demonstrated that beyond the
mandatory investments like CBS, large IT
investments typically destroy value. Simple and low
cost IT solutions are ofen able to generate the same
or better results as compared to costly branded
sofware.
Userled implementation methodology: Value from
large IT investments is elusive because user acceptance
is not high enough to generate the required reduction
in costs or uptick in revenues. Nextgeneration IT
investments have to involve users up front in system
requirements specifcation, testing, creating awareness
and acceptance, and fnally extracting value.
H
ow the workplace is organized impacts
the productivity of workers. Careful
design of organization can provide the
right foundations for a high level of
engagement and productivity in the
workforce. However, changes in organization should be
made only afer careful thought. Organizational changes
are not easily reversible, because these survive in the
perceptions of people. Perceptions take a lot longer than
reality to change. The productivity survey has highlighted
fve areas of organizational intervention that can spur
higher productivity in Indian banks.
Lean Overheads: Cut with Care
Exhibit 5a illustrates administrative FTE as a percentage
of total FTE in Indian banks. Administrative staf account
for about 11 percent of total staf in Indian banks. This
compares well with about 10 percent observed by BCG in
banks, on an average, worldwide. Administrative staf
includes all employees in head ofce, regional ofces, and
other such layers above branches. It does not include
workers in backofce processing centres and business
development teams that are not based at the branches.
Some banks in India have as low as 7 percent
administrative staf. Others have as high as 15 percent.
Clearly there is a wide range in productivity of overhead
administrative staff. Scale effect is not visible. Large
banks, on an average, do not have lower administrative
overheads. It is clear that many banks can enhance
productivity signifcantly by optimizing their overheads.
Reduction in overheads has to be exercised with great
caution. Wrong cuts can be retrograde and debilitating. A
common mistake made by some organizations is to
pursue a blanket reduction of one tier in the organization
hierarchy (four tiers to three tiers). This is often
counterproductive. Diferent businesses require diferent
number of tiers to provide efective spans of control.
Corporate banking needs a twotier structure; SME
banking needs a threetier structure; retail needs four
tiers or more. Organizational tiers have to be aligned to
the economics of the diferent businesses.
BCGs proprietary Delayering
TM
methodology for the
creation of Lean organization design with optimum
Exhibit 5a. 11% of the total staff in
administrative offices
Sources: FIBAC Productivity Survey 2011; BCG global enterprise
excellence database for banks; BCG analysis.
Note: The total staff includes the staff of captive subsidiary and
outsourced staff. Administrative offices include Head office and
Regional / Zonal / Circle offices. It does not count staff in processing
centres, direct sales and business development teams not sitting in
branches.
Productivity of work is not the responsibility
of worker but of the manager
Peter Drucker
HighPerformance
Organization Design
10
15
HO + RO FTE / total FTE (%)
5
11.5
0
10.1
Global median
Private
(Old)
PSU
(Large)
PSU
(Medium)
Foreign Private
(New)
6.4
14.6
14.3
14.5 14.4
10.6
9.1
11.2
5.8
7.6
11.1
12.2
12.2
9.0
10.8
administrative overheads is based on the idea of optimum
span of control at every level in the organization. On an
average, a span of control of fve to seven is considered
optimum (unless the role is too simple and can aford
more, or is too complex and deserves less). Ofen, bloated
administrative ofces have many positions with spans of
control as low as two or three. Optimum spans of control
at each level ensure that all managers are appropriately
stretched and there is no micromanagement.
Exhibit 5b illustrates the framework used by BCG to bring
about a balanced reduction in overhead costs and, at the
same time, enhance the quality and speed of decision
making in the organization. Three primary drivers of
overhead cost reduction also lead to faster and better
decisions.
Focus on reducing the number of meetings and
increasing the number of decisions made per meeting
leads to better utilization of top management time.
Similarly, focus on elimination of double work (once
in the BU and then at the corporate centre) leads to
higher empowerment of employees.
Removal of wasteful reviews increases speed of
decision.
Bolster Finance and HR Expertise
Exhibit 5c illustrates the fnance and HR manpower of
banks in India as a percentage of total manpower. On an
average, the finance function has about 1.3 percent
manpower and the HR function has about 0.6 percent of
staf in Indian banks. Globally, the average for banks is
about 5 percent for fnance and 1.5 percent for the HR
function. Banks in India typically work with less than half
of the benchmark staf strength for fnance and planning
as well as HR. There is a wide variation observed in these
ratios among the surveyed banks in India. Clearly the
practices vary.
The key issue in finance and HR is not about cost
reduction but expertise and capability enhancement to
implement bestinclass performance measurement
systems and HR practices to improve employee
producti vi ty. Consi deri ng current l evel s of
underinvestment, many banks will beneft by augmenting
their HR and fnance teams with expert skills.
Exhibit 5b. Attaining overhead efficiency by better decision making processes
Source: BCG project experience.
Enable and accelerate
effectiveness and growth
Drive to a lower cost structure
Faster decision to action
Pathtooutcome requires fewer

resources, less time
Reduced waste from
ordertaking mentality;
employees ask why and
how?
Decisions communicated and

implemented more rapidly
Ideas from line less distorted as
they move up the organization
Better decision making
More intense customer focus

throughout the organization
Senior leaders closer to the
customer
Fewer meetings, more decisions

More decisions focused on
customer, revenue or cost
actions
Enhanced accountability
Employees empowered with

broader, clearer mandates
Fewer blockers to say no
Shadow organizations
eliminated
Limited micromanaging
Removal of doublework due to

multiple decision nodes
Fewer ad hoc lowvalueadded
requests
1
2
3
Invest in Performance Measurement:
Measure New Things to Get New Things
Done
Like any other area of performance, productivity
excellence is possible only with meticulous measurement.
Traditional measures of performance assessment do not
explicitly have productivity metrics. Banks should be able
to ascertain productlevel and BUlevel net proftability
on a fullcost basis; capital has to be allocated to
businesses and return on riskadjusted capital calculated
for businesses and products. Also, productivity metrics
should be measured and targeted, and employee
performance assessment linked to such metrics. For most
of the above, banks should invest in a capable
management accounting team distinct from their
fnancial accounting departments. Exhibit 5d illustrates
the percentage of banks in diferent categories which
afrmed the existence of capabilities and systems on each
of these fve areas. Banks, in both private and public
sectors, have to make these investments. Banks need to
augment the fnance and HR teams with number of
quality of staf who can operationalize and institutionalize
new performance measurement systems.
Reform the Public Sector Compensation
Model
BCGs project experience has demonstrated that incentive
compensation is the most powerful lever to enhance
productivity. Typically, variable compensation at 1520
percent of fxed compensation is found to be efective in
providing credible incentive. Exhibit 5e illustrates variable
compensation as a percentage of total employee cost in
Indian banking for various banks. On an average, the
industry has two percent variable compensation. New
private sector banks and foreign banks operate close to
the benchmark range of variable compensation of 1520
percent. However, there is a signifcant variation and
some banks are quite low on variable compensation. Old
private sector banks are only halfway there.
Public sector banks are in urgent need to introduce
credible performancelinked compensation. The current
spend on variable pay is almost negligible. Existing
guidelines from ministry of finance limit variable
compensation to one percent of PAT, which is roughly
one percent of total employee costs. Banks typically fnd
it difcult to distribute even up to this low prescribed
Exhibit 5c. Staff in support functions
Sources: FIBAC Productivity Survey 2011; BCG global enterprise excellence database for banks; BCG analysis.
Note: The total staff includes the staff of the captive subsidiary as well as the outsourced staff.
1
Finance includes planning, accounting and corporate finance staff at head office and other administrative offices like regional office, zonal office, circle
office, Local Head Office (LHO), etc.
1.3 percent of staff in finance and audit
less than one fourth of the global benchmark
0.6 percent of staff in HR roles
less than half of the global benchmark
India industry average Global median
1.3
5.4
4
6
(%)
2
0
1.5
2.0
(%)
1.0
0.6
0.0
1.5
0.5
Private
(Old)
PSU
(Large)
PSU
(Medium)
Foreign Private
(New)
Private
(Old)
PSU
(Large)
PSU
(Medium)
Foreign Private
(New)
2.8
2.4
4.0
3.3
1.9
0.9
0.9
0.5
0.9
0.4
1.5
2.6
2.2
1.0
1.5
1.1
1.3
1.2
0.7
1.2
1.5
1.2
0.4
1.1
0.6
0.1
1.0
0.3
0.9
0.3
limit. PSU banks should expeditiously deploy systems
that can facilitate diferentiation among employees based
on performance, and award variable compensation to
staf. The Government of India should facilitate higher
levels of variable compensation in PSU banks.
Adopt Alternate Manpower Solutions:
Critical for Low Cost Banking
On an average, outsourced manpower costs and captive
manpower subsidiary costs account for about two percent
of total manpower costs of banks in India. This ratio is
higher at 510 percent for new private sector banks and
foreign banks. Such solutions provide a way for the banks
to deploy manpower at a cost much lower than on their
own books. So far, such solutions have been adopted for
feetonstreet sales staf. We believe that in future, such
solutions will be required on a larger scale to create low
cost banking business models for fnancial inclusion.
Lowcost banking models require manpower at
substantially lower costs (1020 percent of current per
head costs). Keeping manpower at two vastly diferent
compensation levels in the same legal entity creates its
own set of management issues.
Exhibit 5d. Next generation measurement systems
Measurement systems act as foundation for high performance organization design
Note: As claimed by banks in FIBAC Productivity Survey 2011.
1
MFTP = Matched Funds Transfer Pricing.
Exhibit 5e. Performance linked pay
Variable pay as a percentage of total employee
is only 2%
Note: The total cost attributable to the employees includes fixed
salary, bonus, pension and gratuity.
Organization capabilities Percentage of banks with all five ticks ( )
Access product level and SBU level net
profitability by applying MFTP
Management accounting distinct from
financial accounting
Allocate capital to business units and use for
performance measurement
Executive performance assessment linked to
targeted productivity metrics
Dedicated unit for continuous process quality
measurement and improvement
1
50
75
100
(%)
25
Private
(Old and New)
Foreign PSU
0
100
45
13
10
20
(%)
5
2.0
0
15
Private
(Old)
PSU Private
(New)
15
20
Typical benchmark range
1.5
14.0
18.6
8.4
8.2
12.2
0.1
0.0
0.0
T
he gross NPA ratio in the Indian banking
industry came down from more than 10
percent in the early part of the last decade
to less than 2.5 percent by the end of the
decade. As illustrated in Exhibit 1a, the bad
debt charge to the P&L of the Indian banking sector is in
the lower half of the spectrum amongst comparable
economies. Unlike many developed economies, this
charge has not increased signifcantly post crisis. Control
over bad debt indeed appears to be one of key successes
of the industry and its regulators. A disaggregated and
closer examination of bad debt fgures, however, is not so
comforting.
Address Weaknesses Where they Hurt
Most
Exhibit 6a illustrates the profle of bad debt in the books
of Indian commercial banks as on March 31, 2011.
Corporate and institutional credit, which accounts for
more than 50 percent of the credit, is the lowest risk
segment followed closely by home loans. Unsecured
Exhibit 6a. NPA profile of India Banking
Category wise NPA
Sources: FICCI IBA Productivity Survey 2011; BCG analysis.
Note: Asset Finance = Construction equipment, commercial vehicles; Loan against security = Loan against jewels, deposits, shares, etc.
Avarice and usury and precaution must
be our Gods for a little longer still
John Maynard Keynes
Bad Debt Management
Proactive, Preemptive, and Preventive
4
2
0
Gross NPA (%)
3
1
5
80 100 60
1.52%
0.30%
4.01%
40
3.26%
3.74%
20
4.24%
2.23%
0
4.96%
Unsecured
and student
MSME
Auto loan
Agriculture
Asset finance
Home loan Corporate and institutional
% composition of advances
Loan against security
credit is understandably the most risky segment with, on
an average, 5 percent gross NPA outstanding. MSME
credit at 4.24 percent and agriculture credit at 3.61
percent stand out as large business segments with high
risks. No wonder banks shy away from these highpriority
sectors of the economy.
In a more evolved financial system, corporate and
institutional credit would get disintermediated as
corporate clients tap wholesale debt markets directly for
lower borrowing costs. Banks would then have to focus
on MSME, retail, and agriculture credit and learn to
manage the bad debt in these important segments. Not
so yet in India. The Indian wholesale debt market is quite
shallow and the corporate sector depends heavily on
bank fnance for credit needs. For most banks, corporate
credit is the primary driver of growth on the asset side
and retail, MSME and agriculture function only as a top
up or are seen as mandatory obligations to be fulflled.
Consequently, in India, MSME credit grows slowest
amongst all segments and the banking industry is
perennially short of agriculture credit targets. Bad debt
levels continue to be high in these segments because of
lack of innovation in credit delivery.
Build Risk Skills in the Public Sector
Exhibit 6b and 6c illustrate the position of bad debt on
the balance sheets of banks in diferent segments in
home loans and MSME advances, respectively. MSME
credit is a traditional segment that has been in existence
for decades and is typically considered risky. Home loan
is a new area of credit that has become signifcant only in
the last decade and is typically considered safe. As one
would expect, there is a wide range in the bad debt
experience of banks. Private sector performance is in a
narrow band. Public sector performance is highly
disbursed in a wide band. A number of public sector
banks have very high levels of NPA in home loan, which
is conventionally considered one of the safest loan
categories. This could be because of the fact that exposure
to home loans of such banks is smaller than the critical
size required to acquire minimum expertise and create a
viable business model. Home loan is a new product for
most public sector banks and needs a special business
model and risk system to manage it. It is interesting that
the new private sector, which is dominant in home loan,
has, on an average, done better in risk management so
far. New private sector initiated the home loan business
Exhibit 6b. Wide range in NPA performance
Gross NPA in home loans
1
Percentage of banking industry comprises only the 40 banks surveyed.
Gross NPA (%)
6
0
2
1
3
Private (Old) PSU (Large) PSU (Medium) Foreign Private (New)
7% 17% 15% 8% 8%
5.54
2.46
0.34
28% 7% 23% 2% 40%
Home loan as
percentage of total
advances
Percentage of
banking industry
home loans
1
5.69
2.41
1.20
3.69
3.04
1.91
1.79
1.33
0.46
5.12
2.49
1.12
with a customized business model and risk management
practices. The same is not true for the old private sector
where bad debt levels are high for all players in a narrow
band. The story on MSME is diferent. The public sector
is not a marginal but the dominant player here and has
been doing this business for years. New private sector has
stayed small, contained its exposure, and cherrypicked
good risk. Old private sector appears to be the worst hit.
Public sector performance spans the whole range from
best to worst. There is learning to be shared between
public sector banks. Risk management is a capability that
comes with experience. The public sector will lose a lot
of experienced staf because of retirements in the next
fve years. It is thus poised for further weakening of its
risk management capacity.
In the foreseeable future, it is conceivable that public
sector banks will continue to fnance the lions share of
priority sector segments like MSME and agriculture. It is
also conceivable that the public sector will continue to
increase its exposure to new credit segments like
mortgages and retail lending. It is imperative that it builds
nextgeneration systems and business models for risk
management on a top priority basis.
Adopt New Paradigm for Risk
Management
Risk management is a core capability for banks. To retain
the right to participate proftably in the lending business,
banks have to continually upgrade their business models
and systems. Lending is made further complex with the
rapid pace of change in the Indian economy. New
customer segments are emerging, new products are being
designed, and the legal and regulatory framework is
being fnetuned. Banks have to invest in fve areas to
retain their edge over their borrowers and get their
money back.
Operating model
The operating model for the lending business has to vary
quite signifcantly by product lines. This is illustrated in
Exhibit 6d. Retail lending needs centralization of
processing, collections, and operations. Credit decisions
have to be rulebased. Credit scoring has to be based on
credit history and customer data. Collections have to be
algorithmic and structured. SME lending needs close
interaction, personal knowledge and followup with the
borrowers. A borrowers intent to repay is crucial to know
Exhibit 6c. Wide range in NPA performance
Gross NPA in MSME advances
1
Percentage of banking industry comprises only the 40 banks surveyed.
MSME as percentage
of total advances
Percentage of
industry
MSME loans
banking
1
Gross NPA (%)
12
0
4
2
6
Private (Old) PSU (Large) PSU (Medium) Private (New)
11.29
3.73
0.35
7.93
5.12
1.47
10.93
6.40
2.31
1.72
1.00
0.00
13% 10% 14% 12%
39% 11% 3% 44%
4.21
and act upon. Surrogate measures have to be used for
credit assessment. Processing can be centralized at the
local level. Rural and agricultural credit require unity in
origination and collection, high level of community
knowledge, appreciation of livelihoods and cashfow
patterns of various rural professions, and use of social
collateral. Large corporate credit requires highquality
financial analytics, projections, industry expertise,
fnancial deal structuring, and contract design. It is clear
that everything cannot happen in a traditional branch
setup. Structures, roles, and processes have to vary.
Minimum critical size
Risk management is an experiential capability that
develops in employees with time and experience. A
minimum size of business at the country level and at
local level is crucial to provide the staf with the critical
experience to manage risk. Banks have to decide what
products not to ofer till they have intent to participate at
a critical size.
We observed in the survey that NPA levels typically fall
with increase in market share till they reach a critical size
of 510 percent depending upon product.
Technical expertise
Technical aspects of risk management vary by product
segment and employees have to be assigned and trained
specifcally for each product.
Experience
Conventional training is necessary but not sufcient for
risk management. Risk management continues to be an
art that requires personal experience and time. Training
has to be complemented with mentorship and
apprenticeship for the juniors. It is important to create
career tracks and build cadres of employees who can
envisage spending their whole career honing their credit
and risk skills to perfection over time.
Discipline in processes, supported by
technology
Daytoday process discipline is the underlying
foundation on which the expertise can be executed. The
primary issue in risk management is the speed with
which banks respond on noticing the first signs of
problems and whether decisions to foreclose are taken on
time or are delayed on false hopes. Exhibit 6e highlights
this weakness in Indian banking, based on responses to
Exhibit 6d. NPA management: proactive, preemptive, and preventive
Segmented strategy by business area
Source: BCG analysis.
1
LTV Loan to Value.
2
LTI Loan to Income.
Industrialised model,
segregation of origination
and collection
Credit information
bureau
alytics
Prudent norms on LTV
and LTI
Algorithmic response
to default
Programmed alerts prior
to due dates
1
2
An
Cluster based surrogate

measures
Asset based lending
techniques
Information services
Factoring services
Segmented response on
basis of borrower intent
Local centralization of
credit skills
Close physical monitoring
of business for early
detection of business
stress
Unity in origination and

collection
Technical knowhow of
livelihood
Community due diligence
Social collateral
Aligning repayment
schedule and collection
strategy to income
pattern
Industry expertise and

technical know how
Financial analysis and
projections
Deal structuring, risk
mitigation and design
of covenants
Sectorwise portfolio
management
Retail finance and
asset finance MSME
Rural and agriculture
Corporate and
infrastructure
the productivity benchmarking survey of the 40 largest
banks. Exhibit 6e illustrates the time that banks claim
they take in reaching out to a customer who has
defaulted / missed a payment. In retail loans, about 50
percent of the banks in the sample claim to reach out to
the defaulting customer in a month or more, while this is
something that should be done on the same day. For
commercial credit, the response time is marginally better
but hardly where it should be.
For the public sector, the challenge of transformation is
higher because it has to change the old business model
and introduce new expertise, business model, and
processes. The road to excellence in risk management is
a mandatory journey for banks and speed is of the
essence.
Imperatives for Government and RBI
Out of the fve areas of productivity excellence, bad debt
management is the one where the government and the
regulator have as much of a role as the banks. Recovery
happens within a social, legal, and regulatory framework.
The government and the RBI have their roles cut out for
them to create an enabling and facilitative environment
for better risk management by banks.
Key imperatives for the Government are:
The singlemost powerful enabler for bad debt
management is the availability of credible collateral,
certainty of its valuation, and ease of its repossession
in the event of default. The government has to play a
crucial role in all of this.
Real estate is by far the biggest collateral for banks.
The real estate market needs regulation and reforms
to ensure transparent valuation of the property to be
used as collateral and also to ensure speedy disposal
of property. Easily available and welldocumented
title deeds for property in urban centres will increase
the fow of credit to SME and small entrepreneurs and
also help banks manage risks better. Property rights
for slum dwellers could unleash credit fow to them.
Computerization of land records will facilitate
agricultural lending by making the process of
mortgaging agricultural land fast and transparent.
Exhibit 6e. Wide variance in response time to default
Number of days taken to reach out to customers post default
Retail advances Commercial advances
2
6
12
13
5
Number of banks
15 10 5 0
Time
>1 month
1 month
1 week
13 days
Same day
Number of banks
15 10 5 0
Time
>1 month
1 month
1 week
13 days
Same day
15
12
3
2
6
Speed and certainty of contract enforcement have a
direct impact on a banks ability and willingness to
take risks. The introduction of the SARFAESI Act
improved the quality of bad debt management in
banks signifcantly. However, the speed of decisions
especially those involving court procedures has a
long way to go.
As a primary owner of public sector banks, the
government has a responsibility to push for faster
capacity building and operating model transformation
at public sector banks. Induction and grooming of new
talent, as a large number of experienced staf retires, is
the frst step. However, as highlighted above, credit risk
is not just a matter of classroom training. It is acquired
through onthejob handson experience over time.
The government should insist on welldefned
career tracks and grooming through job rotations
for personnel having an aptitude for credit risk.
To ensure that risk management is on top of the
agenda, the government should ensure that
selections for top jobs at public sector banks lays
emphasis on appreciation of risk management.
Metrics for performance assessment at the banks
have to move to riskadjusted measures like Return
On Risk Adjusted Capital (RORAC) so that the top
management is sensitized to the centrality of risk in
decision making. The current vigilanceinspired
accountability framework encourages people to go
by the book even if it is against business judgment.
A new system of performance accountability has to
celebrate quality of business decisions.
The government should facilitate the creation of a
dedicated institute for risk management for capability
creation in the public sector banking industry.
Key imperative for the RBI are:
Set a higher aspiration for Indian banks: The RBIs
insistence on prudential norms for asset recognition
and adoption of Basel norms has been instrumental in
pushing the quality of risk management in Indian
banking to a whole new level. Improvement in the
quality of Indian banks books is shining evidence of
this. The RBI has to now set its sights on a higher
aspiration for Indian banks on risk management
even as the rest of the world is still unclear about the
implications of the banking crisis.
Create a centre for excellence in risk management:
Compliance with Basel III could hardly be a worthy
goal for the Indian banking industry. Afer all, many
Basel II compliant banks quickly succumbed to the
banking crisis. The RBI, vindicated by the performance
of Indian banks through the global banking crisis, has
to assume leadership in defining the new Indian
paradigm for risk management in post crisis banking.
Broad contours of such a new paradigm could be ideas
that do not find sufficient attention in the Basel
framework but have been found to be crucial when
crisis hits.
Emphasis on exante assessment of risk as against
expost analysis.
Emphasis on detection of risk through multiple
signaling channels.
Emphasis on the role of appropriate operating
models for efective risk management in diferent
product classes.
Emphasis on expertise building with added attention
towards retention of experience and institutional
memory in the organizations.
Newgeneration performance measurement metrics
to ensure that top management incentives are
aligned to risk management.
To give shape to and propagate this new paradigm, the
RBI could set up a dedicated centre of excellence in risk
management as a think tank, research institute, and
senior management training facility.
Rapid acceleration in adoption of credit information
bureaus: The RBI should facilitate if required by
regulatory fat faster build out of retail, rural and
MSME credit information bureaus in the country. The
systemic value of such an intervention is large enough
to justify regulatory coercion. With the rapid rollout of
Aadhar, the quality of information bureaus (and
quality of risk management in Indian banking) can be
enhanced by an order of magnitude.
Note to the Reader
About the Authors
Saurabh Tripathi is a Partner &
Director in the Mumbai ofce of The
Boston Consulting Group. Bharat
Poddar is a Principal in the Mumbai
ofce of The Boston Consulting
Group.
For Further Contact
If you would like to discuss the
themes and content of this report,
please contact:
Alpesh Shah
BCG Mumbai
+91 22 6749 7163
shah.alpesh@bcg.com
Ashish Garg
BCG New Delhi
+91 124 459 7123
garg.ashish@bcg.com
Bharat Poddar
BCG Mumbai
+91 22 6749 7145
poddar.bharat@bcg.com
Janmejaya Sinha
BCG Mumbai
+91 22 6749 7003
sinha.janmejaya@bcg.com
Neeraj Aggarwal
BCG New Delhi
+91 124 459 7078
aggarwal.neeraj@bcg.com
Pranay Mehrotra
BCG Mumbai
+91 22 6749 7143
mehrotra.pranay@bcg.com
Ruchin Goyal
BCG Mumbai
+91 22 6749 7083
goyal.ruchin@bcg.com
Saurabh Tripathi
BCG Mumbai
+91 22 6749 7013
tripathi.saurabh@bcg.com
Acknowledgments
This report has been prepared by
The Boston Consulting Group. The
authors would like to thank IBA for
help with conducting surveys within
member banks. The analysis of the
survey has been included in this
report. The authors also gratefully
acknowledge the contributions of
Amit Sachdev, Avartan Bokil, Bharat
Mimani, Kedar Gokhale and Kirti
Choudhary in conducting various
analyses for this report and David
Nazareth for supporting analysis. A
special thanks to Payal Sheth for
managing the process logistics along
with Jamshed Daruwalla, Pradeep
Hire and Sajit Vijayan for their
editing, designing and production
support for this report. Also a special
thanks to Ranu Dayal, BCG New York
for his thoughtful comments and
guidance.
The authors gratefully acknowledge
the data collection eforts on various
productivity metrics from 40
participating banks made by the
respective nodal teams as listed
below. This report would not have
been possible without their invaluable
support.
Mr. V. Madhava Pai
Allahabad Bank
PSU (Medium)
Mr. Y. Prasad
Andhra Bank
PSU (Medium)
Mr. R. D. Frank
Axis Bank
Private (New)
Mr. R. P. Marathe
Bank of Baroda
PSU (Large)
Mr. M. M. Vaidya
Bank of India
PSU (Large)
Mr. Pradeep Mishra
Bank of Maharashtra
PSU (Medium)
Dr. Rajib K. Sahoo
Canara Bank
PSU (Large)
Ms. Tessy Sebastian
Catholic Syrian Bank
Private (Old)
Note to the Reader
Mr. M. M. Panda
Central Bank of India
PSU (Medium)
Mr. Rajarshi Chakraborty
Citibank
Foreign
Mr. B. Lakshminarayana
Corporation Bank
PSU (Medium)
Mr. T. R. Chawla
Dena Bank
PSU (Medium)
Mr. Jose K. Mathew
Federal Bank Limited
Private (Old)
Mr. V. Tandon and Mr. R. Rajak
HDFC Bank
Private (New)
Mr. Vivek S. Kadam
HSBC
Foreign
Mr. Laxminarayan Achar
ICICI Bank
Private (New)
Ms. Perizad Ghosh
IDBI Bank
PSU (Medium)
Mr. V. Srinivasan
Indian Bank
PSU (Medium)
Mr. L. Venkatachalam
Indian Overseas Bank
PSU (Medium)
Ms. Gargi Dash
ING Vysya Bank
Private (Old)
Mr. Surender K. Bhat
J & K Bank
Private (Old)
Mr. S. Ramesh
Karnataka Bank Limited
Private (Old)
Mr. G. Mohan Kumar
Karur Vysya Bank
Private (Old)
Ms. Shilpa Joshi
Kotak Mahindra Bank
Private (New)
Mr. Deepak Singh
Oriental Bank of Commerce
PSU (Medium)
Mr. P. S. Sodhi
Punjab & Sind Bank
PSU (Medium)
Mr. R. D. Kailey
Punjab National Bank
PSU (Large)
Mr. Ian Fernandes
Standard Chartered Bank
Foreign
Mr. G. Harinath
State Bank of Hyderabad
PSU (Medium)
Mr. C. Raghu Kumar
State Bank of India
PSU (Large)
Mr. G. D. Mathur
State Bank of Mysore
PSU (Medium)
Mr. Jasvinder P. S. Bhatia
State Bank of Patiala
PSU (Medium)
Mr. Raj Sekhar
State Bank of Travancore
PSU (Medium)
Mr. A. S. Chandrashekar
Syndicate Bank
PSU (Medium)
Mr. Vijith S.
The South Indian Bank Limited
Private (Old)
Mr. A. C. Slath
UCO Bank
PSU (Medium)
Mr. Nitesh Ranjan
Union Bank of India
PSU (Large)
Mr. K. S. Nagaraj
United Bank of India
PSU (Medium)
Mr. J. Pandiyan
Vijaya Bank
PSU (Medium)
Mr. Vivek Bansal
Yes Bank
Private (New)
For Further Reading
The Boston Consulting Group has
published other reports on this topic
which may be of interest to senior
management. Recent examples
include:
Building on Success
A Global Asset Management 2011
report by The Boston Consulting Group,
July 2011.
Checks and Balances: The Banking
Treasurys New Role Afer the
Crisis
A white paper by The Boston Consulting
Group, May 2011.
The Mobile Financial Services
Development Report
A report by the World Economic Forum,
prepared in collaboration with The
Boston Consulting Group, May 2011
Shaping a New Tomorrow: How to
Capitalize on the Momentum of
Change
A Global Wealth 2011 report by The
Boston Consulting Group, May 2011.
Financial Inclusion: From
Obligation to Opportunity
A report by The Boston Consulting
Group, February 2011.
Operational Excellence in Retail
Banking: How to Become an
AllStar
Group, February 2011.
The Road to Excellence
A Global Retail Banking 2010/2011
report by The Boston Consulting Group,
December 2010.
Indian Banking 2020: Making the
Decades Promise Come True
Group, September 2010.
Equity Mutual Funds: Charting
your Course with a Compass
Group, June 2010.
Global Wealth Management:
Regaining Lost Ground
Resurgent Markets and New
Opportunities
Group, June 2010.
Retail Banking: Winning
Strategies and Business Models
Revisited
A White Paper by The Boston Consulting
Group, January 2010.
Global Payments: Weathering the
Storm
Group, March 2009.
Corporate Banking: Thriving in
the New Normal
Group, December 2008.
Value Creation in Indian Banking:
Tale of Business Model Discount
Group, July 2008.
The Next Billion Consumers: A
Road Map for Expanding Financial
Inclusion in India
Group, November 2007.
The Next Billion Banking
Consumers
An OFA by The Boston Consulting Group,
June 2007.
For a complete list of BCG publications and information about how to obtain copies, please visit our Web site at
www.bcg.com/publications.
To receive future publications in electronic form about this topic or others, please visit our subscription Web site at
www.bcg.com/subscribe.
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Pathtooutcome requires fewer

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Removal of doublework due to

Cluster based surrogate

Unity in origination and

Industry expertise and

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