Banking Industry - Vision 2010
[Source: IBA Committee under the Chairmanship of Shri S C Gupta, CMD IOB ]

Product Innovation and Process Re-engineering

With increased competition in the banking Industry, the net interest margin of banks has come down over the last one decade. Liberalization with Globalization will see the spreads narrowing further to 1-1.5% as in the case of banks operating in developed countries. Banks will look for fee-based income to fill the gap in interest income. Product innovations and process re-engineering will be the order of the day. The changes will be motivated by the desire to meet the customer requirements and to reduce the cost and improve the efficiency of service. All banks will therefore go for rejuvenating their costing and pricing to segregate profitable and non-profitable business. Service charges will be decided taking into account the costing and what the traffic can bear. From the earlier revenue = cost + profit equation i.e., customers are charged to cover the costs incurred and the profits expected, most banks have already moved into the profit =revenue - cost equation. This has been reflected in the fact that with cost of services staying nearly equal across banks, the banks with better cost control are able to achieve higher profits whereas the banks with high overheads due to under-utilisation of resources, un-remunerative branch network etc., either incurred losses or made profits not commensurate with the capital employed. The new paradigm in the coming years will be cost = revenue - profit.

As banks strive to provide value added services to customers, the market will see the emergence of strong investment and merchant banking entities. Product innovation and creating brand equity for specialized products will decide the market share and volumes. New products on the liabilities side such as forex linked deposits, investment-linked deposits, etc. are likely to be introduced, as investors with varied risk profiles will look for better yields. There will be more and more of tie-ups between banks, corporate clients and their retail outlets to share a common platform to shore up revenue through increased volumes.

Banks will increasingly act as risk managers to corporate and other entities by offering a variety of risk management products like options, swaps and other aspects of financial management in a multi currency scenario. Banks will play an active role in the development of derivative products and will offer a variety of hedge products to the corporate sector and other investors. For example, Derivatives in emerging futures market for commodities would be an area offering opportunities for banks. As the integration of markets takes place internationally, sophistication in trading and specialized exchanges for commodities will expand. As these changes take place, banking will play a major role in providing financial support to such exchanges, facilitating settlement systems and enabling wider participation.

Bancassurance is catching up and Banks / Financial Institutions have started entering insurance business. From mere offering of insurance products through network of bank branches, the business is likely to expand through self-designed insurance products after necessary legislative changes. This could lead to a spurt in fee-based income of the banks.

Similarly, Banks will look analytically into various processes and practices as these exist today and may make appropriate changes therein to cut costs and delays. Outsourcing and adoption of BPOs will become more and more relevant, especially when Banks go in for larger volumes of retail business. However, by increasing outsourcing of operations through service providers, banks are making themselves vulnerable to problems faced by these providers. Banks should therefore outsource only those functions that are not strategic to banks' business. For instance, in the wake of implementation of 90 days' delinquency norms for classification of assets, some banks may think of engaging external agencies for recovery of their dues and in NPA management.

Banks will take on competition in the front end and seek co-operation in the back end, as in the case of networking of ATMs. This type of competition will become the order of the day as Banks seek to enlarge their customer base and at the same time to realize cost reduction and greater efficiency.