Final 100mks Project.doc Final.doc 21.09 Repaired)

Strategies adopted by banks to improve their overerall pereformance

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EXECUTIVE SUMMARY

In today’s competitive market, it has become vital for bank to improve their overall

performance. Performance in the banking sector means process for establishing an

understanding about what is to be achieved, how it is to be achieved and the

probability of achieving success. It is about every actions and behavior which

individuals take to manage planned processes, which pervade the organization

where individuals function.

This report includes:

Need for performance:

To earn profit.

To attract more customer, shareholders etc.

To gain a key position in the market.

To manage risk.(credit, market, operations risk)

To improve branch operations.

Design and execute more effective marketing campaigns etc.

There are various factor on which the performance can be measured. This report

describe in brief the financial and non financial indicators of performance,balance

scorecard followed by banks, and performance guideliness.

Banks have been forced to the volatile changes in the business environment through

various defensive strategies. Banks operate in a complex, competitive and highly

regulated environment, with low margins and high customer expectations. To

manage this rapidly changing economic and regulatory landscape, banks need a

reliable way to quickly translate strategic business decisions into concrete actions

that lead to measurable results. Much of the banks need to make strategic decisions


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that can improve their performance and increase their profitability. To improve

performance it is very important that banks adopt certain strategies. This report

recommends both:

Qualitative strategies.

Quantitative strategies and

Other strategies.

These strategies help banks to survive and grow profitably with the changing needs

of consumers and market. Banks recently have been swept by numerous trends,

causing remarkable changes in their position and operations. These changes have

caused banks to become larger, better, faster and more reliable and resistant. Even if

banks have become larger, the effect of technological changes, volatility and global

trends, weakened them. Banks rely on strategies to take certain crucial decisions.

The report addresses the various risk associated with banking activities and give

appropriate strategies to manage these risk efficiently.

While implementing the strategies a lot of hurdles are faced by bank like:

Penetration of banking services.

Competition.

Economic recession.

Basel II norms.

Geographical expansion and consolidation.

Borrowings from capital market.

Deregulation

Technological revolution.

Hence banks have to prudently manage all the risk and hurdles that comes in the

way of implementing the strategies. Banking industry has travelled long way post


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independence and has undergone enormous changes in its operation, efficiency and

product design and delivery with the changing external and internal factors.

Strategic management has therefore become an important part of its planning to

survive in the ever changing economy to improve their performance.


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1. INTRODUCTION TO INDIAN BANKING SECTOR

Just imagine, for a moment, a world without banking institutions, and then to ask

yourself a few questions.

If there were no banks…..

Where would you go to borrow money?

What would you do with your savings?

Would you be able to borrow (save) as much as you need it, in form of that would

be convenient for you?

What risks might you face as a saver (borrower)?

The banking industry in India is governed by Banking Regulation Act of India,

1949. A healthy banking system is essential for any economy striving to achieve

good growth and yet remain stable in an increasingly global business environment.

The Indian banking system, with one of the largest banking networks in the world,

has witnessed a series of reforms over the past few years like the deregulation of

interest rates, dilution of the government stake in public sector banks (PSBs), and

the increased participation of private sector banks. The growth of the retail financial

services sector has been a key development on the market front. Indian banks (both

public and private) have not only been keen to tap the domestic market but also to

compete in the global market place. New foreign banks have been equally keen to

gain a foothold in the Indian market. The growth in the Indian Banking Industry has

been more qualitative than quantitative and it is expected to remain the same in the

coming years. Based on the projections made in the "India Vision 2020" prepared

by the Planning Commission and the Draft 10th Plan, the report forecasts that the

pace of expansion in the balance-sheets of banks is likely to decelerate. The Indian


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Banking Industry can be categorized into non-scheduled banks and scheduled

banks. Scheduled banks constitute of commercial banks and co-operative banks.

There are about 67,000 branches of Scheduled banks spread across India. As far as

the present scenario is concerned the Banking Industry in India is going through a

transitional phase

The Public Sector Banks (PSBs), which are the base of the Banking sector in India

account for more than 78 per cent of the total banking industry assets.

Unfortunately they are burdened with excessive Non Performing assets (NPAs),

massive manpower and lack of modern technology. On the other hand the Private

Sector Banks are making tremendous progress. They are leaders in Internet

banking, mobile banking, phone banking, ATMs. As far as foreign banks are

concerned they are likely to succeed in the Indian Banking Industry.

Since 1949, this sector has undergone phenomenal reforms due to the efforts and

the vision of the policymakers. The first phase of reform began with nationalization

of the 14 banks in 1969. At this stage, priority sectors were identified and banking

support was given to them. The second phase was the nationalization of 6 more

banks in 1980. However, what can be considered as a breakthrough in banking

services was the entry to private sector banks which was initiated in 1993. Eight

new banks entered the market at this stage with state of art technology and a

brought with them a new wave of professionalism. It was at this time that India was

introduced to the concept of Debit and Credit cards, e-transfer of funds, ATM and

mobile banking. It was at this time that competition was truly introduced in this

sector.

At present, the industry is in the makeover mode. The Public Sector Banks (PSBs)

are in the midst of rejuvenation process with exercises like downsizing the units,

reducing the volume of Non Performing Assets (NPAs). They are gearing

themselves for the fierce competition that is posed by the private banks.


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Private Banks, on the other hand, are in the consolidation mode. Big banks are

getting bigger. Small banks are being taken over by the bigger ones. Mid sized

banks are expanding.

The sector is in the growth stage with many new products and services offered and

a wide market base tapped. Quality of assets has improved and the confidence in the

system is building up due to the increased transparency norms. Government

interference is also gradually reducing.

Indian banking industry faced many uncertainities during 2008-09 in the face of

tight market liquidity in the global financial markets. The RBI’s prompt and

relevant measures ensured adequate domestic and foreignliqidity to indian banking

so that the flow of credit to productive sector would not suffer much. Yet, on

account of the severe global economic slowdown and its spillover effects on india,

growth of bank credit to commercial sector decelerated in 2008-09.

The Indian banks, in general, posted healthy financial results during 2008-09

compared to their global peer despite challenging economic conditons.The outlook

for Indian banking industry remains positive in 2009-10 on the backdrop of its

stricter prudential regulation by the RBI, sound financial indicators and stable

political regime.


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2.BANKING SECTOR—PERFORMANCE

MEANING:

The traditional thinkers conceive Performance as the final outcome of activities.

Their concept is solely based on the result of actions undertaken. They equate

performance with actions and end results. This understanding has severe limitations

about the concept of performance. There are many situations where there could be

no measurable output despite sincere and competent effort. Again there may be

occasions where high performance can result without putting required type and

quality of effort. The context (situational and exceptional advantage or

disadvantage) where performance takes place has to be appropriately dealt with and

proper weightage is to be put to understand the concept of core performance.

DEFINITION OF PERFORMANCE:

Performance as such can be defined as “being concerned with means as well as

ends, inputs (competence) as well as output (results.” Performance is based on

objectives, knowledge, and skill and competence requirement with respect to plans.

Simply put, performance includes activities where goals are consistently being met

in an effective and efficient manner. Performance is a process foe establishing an

understanding about what is to be achieved, and how it is to be achieved, and an

approach which increase, the probability of achieving success. Performance is about

the everyday actions and behavior which individuals take to manage planned

processes, which pervade the organization where individuals function.


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NEED FOR PERFORMANCE:

Performance is needed in each every sector. Every organization tries its best to

improve their performance. Performance is needed because of following reasons:

The prime objective of an individual or of organization is to perform according to

preplanned standard of quantity and quality to actualize short term goal and realize

long-term mission and vision.

To earn profit.

To attract more customer, shareholders etc.

To gain a key position in the market.

To manage risk.(credit, market, operations risk)

To improve branch operations.

Design and execute more effective marketing campaigns etc.

PERFORMANCE STANDARD

While the list of Major Job Duties tells the employee what is to be done,

performance standards provide the employee with specific performance

expectations for each major duty. They are the observable behaviors and actions

which explain how the job is to be done, plus the results that are expected for

satisfactory job performance. They tell the employee what a good job looks like.

The purpose of performance standards is to communicate expectations. Some

supervisors prefer to make them as specific as possible, and some prefer to use them

as talking points with the specificity defined in the discussion. Keep in mind that

good performance typically involves more than technical expertise. You also expect

certain behaviors (e.g. friendliness, helpfulness, courteousness, punctuality, etc.) It

http://www.indiana.edu/~uhrs/training/performance_management/determine.htm


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is often these behaviors that determine whether performance is acceptable.

Performance standards are:

Based on the position, not the individual

Observable, specific indicators of success

Meaningful, reasonable and attainable

Describe "fully satisfactory" performance once trained

Expressed in terms of Quantity, Quality, Timeliness, Cost, Safety, or Outcomes

In determining performance standards, consider the following:

What does a good job look like?

How many or how much is needed?

How long should it take?

When are the results needed?

How accurate or how good is acceptable?

Are there budget considerations?

Are there legislative or regulatory requirements that require strict adherence?

Are there behaviors that are expected in your department to promote teamwork,

leadership, creativity, customer service?

What results would be considered satisfactory?

The Need for a Range of Performance Measures


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Organizational control is the process whereby an organization ensures that it is

pursuing strategies and actions which will enable it to achieve its goals. The

measurement and evaluation of performance are central to control and mean posing

4 basic questions:-

What has happened?

Why has it happened?

Is it going to continue?

What are we going to do about it?

The first question can be answered by performance measurement. Management will

then have to hand far more useful information than it would otherwise have in order

to answer the other three questions. By finding out what has actually been

happening, senior management can determine with considerable certainty which

direction the company/bank is going in and, if all is going well, continue with the

good work. Or, if the performance measurements indicate that there are difficulties

on the horizon, management can then lightly effect a touch on the tiller or even alter

course altogether with plenty of time to spare.

As to the selection of a range of performance measures which are appropriate to a

particular company/bank, this selection ought to be made in the light of the

company's/bank’s strategic intentions which will have been formed to suit the

competitive environment in which it operates and the kind of business that it is.

For example, if technical leadership and product innovation are to be the key source

of a manufacturing company's competitive advantage, then it should be measuring

its performance in this area relative to its competitors. But if a service company

decides to differentiate itself in the marketplace on the basis of quality of service,


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then, amongst other things, it should be monitoring and controlling the desired level

of quality.

Authors from differing management disciplines tend to categories the various

performance indicators that are available as follows:

Competitive advantage.

Financial performance.

Quality of services.

Flexibility.

Resources utilizationand innovation.

These 6 generic performance dimensions fall into two conceptually different

categories. Measures of the first two reflect the success of the chosen strategy, i.e.

ends or results. The other four are factors that determine competitive success, i.e.

Means or determinants.

Another way of categorizing these sets of indicators is to refer to them either as

upstream or as downstream indicators, where, for example, improved quality of

service upstream leads to better financial performance downstream.

Table 1. Upstream Determinants and Downstream Results

Performance Dimensions Types of Measures

Competitiveness

Relative market share and position

Sales growth, Measures re customer base

Financial PerformanceProfitability, Liquidity, Capital Structure,market Rations, etc.


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Quality of Service

Reliability, Responsiveness, Appearance, Cleanliness,

Comfort,Friendliness, Communication, Courtesy, Competence Access,

Availability, Security etc.

Flexibility Volume Flexibility, Specification and Speed of Delivery Flexibility

Resource Utilization Productivity, Efficiency, etc.

Performance indicators:

There are two types of performance indicators for any bank or any company

namely,

Financial Indicators.

Non-financial Indicators.

Financial Indicators: Financial indicators remain the fundamental management

tool and could be said to reflect the capital market's obsession with profitability as

almost the sole indicator of corporate performance. Opponents of this approach

suggest that it encourages management to take a number of actions which focus on

the short term at the expense of investing for the long term. It results in such action

as cutting back on R & D revenue expenditure in an effort to minimize the impact

on the costs side of the current year's P & L, or calling for information on profits at

too frequent intervals so as to be sure that targets are being met, both of which

actions might actually jeopardize the company's overall performance rather than

improve it.


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Non financial Indicators: Increasingly, over the past decade, there has been

emphasizing that executives should come to realize the importance of the non-

financial type of performance measurement. Research in support of this approach

has come up with new dictums for the workplace: "the less you understand the

business, the more you rely on accounting numbers" and "the nearer you get to

operations, the more non-financial performance indicators you realize could be

valuable aids to better management"; or "graphs and bars carry much more punch

than numbers for the non-financial manager".

So what do non-financial indicators relate to? They relate to the following

functions:-

manufacturing and production

sales and marketing

people

research and development

the environment

BALANCE SCORE CARD METHOD--------A TOOL TO MEASURE

PERFORMANCE

One of the recent dramatic shifts in strategic thinking by management has recently

produced a new approach to performance measurement at many firms, both

financial and nonfinancial. The primary catalyst is an appreciation that financial

measures alone do not provide sufficient information regarding a firms overall

performance. In addition to profit and risk measures, managers need benchmarks

and targets for efforts and activities related to customer satisfaction, employee

satisfaction, organizational innovation, and development of business processes.


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This is particularly true if a bank is customer-focused. Doesn’t it seems appropriate

that management should target and measure performance along the lines of market

share, service quality, customer profitability, sales performance, and customer

satisfaction? Kaplan and Norton have led the thinking in this context with a series

of articles and their book, the balance scorecard, which describes the framework for

integrating financial and no financial performance measures and targets.

A firm’s balance scorecard represents a set of measures that gives managers an

immediate, comprehensive picture of the firm’s business strategy. There are at least

four dimensions: financial, customer satisfaction, internal processes, and

organization innovation. One objective is to help managers focus on a firm’s

competitive agenda. A scorecard approach should help a firm be more customer-

oriented, build teamwork among employees, and improve the quality of product and

services delivery framework if someone can examine 15 to 20 of a firm’s scorecard

measures and be able to understand the firm’s competitive strategy.

A sample balanced scorecard framework with four blocks appears in above table.

Each addresses a different general issue for management that can be described as:

Financial Performance: How Do Stockholders View Our Risk and Returns

Profile?

Customer Performance: How do customers see us?

Internal Process Management: At What Must We Excel?

Innovation and Learning: How Can We Continue To Improve and Create Value?

Completing a scorecard for a bank involves identifying and implementing firm’s

objectives, performance measures and targets, along with initiatives or action steps


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to achieve the objective. Together, this scorecard represents the bank’s vision for

the future and management’s strategy to achieve the vision.

According to Kaplan and Norton, customers are typically most concerned about

time, or how long it takes to meet their needs: products/service quality represented

by the level of defects: service related to whether products or services are

perceived to create value: and cost. The critical issue in internal process

management is to identify the firm’s core competencies and structure processes to

best satisfy customer needs. Today, this requires a reasonably sophisticated

information system to analyze performance measures to assess the source of

problems and track improvement. For innovation and learning, management

should emphasize continued education and a quality work environment for

employees and research and development of new products, markets, and delivery

systems. Finally, each of these three blocks should directly influence the financial

performance of the firm, which is reflected in profits ratios such as return on

equity, return on assets, efficiency ratios, earning per share and economic value

added, among others as well as market share figures and risk measures. [Year]

SCORE CARD MEASURES

FINANCIAL MEASURES CUSTOMER MEASURES INTERNAL MEASURES LEARNING MEASURES

Customer

profitability. Life cycle segment Channel usage Skill competency

market share.

Lifestyle segment Customer satisfaction. Product usage. Sales productivity.

profitability.

Product profitability. Customer retention. Percentage of Employer satisfaction.


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revenue from new

products.

Delivery channel cost. Market share. Percentage of Employee retention.

revenue from

product promotions.

Return on investment. Customer acquisition. Product development cycle Employee satisfaction.

Revenue growth. Customer profitability. Hours with Employee productivity.

customers.

Deposit service cost Share of segment. New product Strategic job coverage

change. revenue. ratio.

Revenue mix. Depth of relationship. Cross-sale ration. Strategic information

availability ratio.

Sales growth and Brand name rating. Channel mix change. Personal goals

target markets. alignment.

Dollars past due Number of customer Service error rate. Revenue per employees.

divided by total dollar complaints. `

loans.

Fee revenue divided Closed accounts by Request fulfillment Sales force average.

by total revenue Reason time length of service.

Net income Share of wallet Loss ratio Turnover.

Return on risk Percent of target Underwriting quality Training hours

adjusted equity Accounts audit divided by FTE.

Net income after Overhead ratio number of training

capital charge . programs offered

Cost of capital

Ratio of branch to on-call Turnover ratio.

transactions-ATM transactions

Efficiency Sales per sales call

Economic value added Sales per referral Turbulence.

Assets per employee New sales divided by

banker productivity

Efficiency ratio


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New sales divided by

as percent of total

Given table lists the performance measures commonly cited by banks in their

scorecards. Note the comprehensive nature of the financial measures and the

emphasis on customer satisfaction, market share, cross-sell ratios, customer profit

ratios, product development and promotion, cost/loss ratios, and quality of service

measures. It is argued that the scorecard framework shares three themes with

traditional investor analysis of banking. First, stock analyst’ focus on earning

quality is analogous to the scorecard emphasis o service quality, customer

satisfaction, and market share, which represent competitive factors. Second,

earnings quality is also evidenced by scorecard concerns about cost and risk control.

Finally, the use of targets and projections for all performance measures is

comparable to what stock analysts do when they attempt to forecast firm earnings

and establish a target stock price. The implication is that banks, which choose to

manage across both financial and non-financial perspective, will better meet

competitive needs. The BSC can be viewed as a two-way street. Since it is designed

to help implement strategy (strategy → BSC), it also should reflect strategy (BSC

→ strategy). One should be able to infer a firm’s strategy by a careful study of the

firm’s.

PERFORMANCE MEASUREMENT GUIDELINES

PROCESS IMPROVEMENT :

Throughout the implementation of a Performance Management system, which may

span from months to years, there is a need to constantly focus on the critical goals

that can bring visible progress and enhancement. Otherwise, there is a tendency for


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busy employees to lose sight of the ultimate objective of performance measurement,

and treat its implementation as a mere data collection exercise for management.

EMPLOYEE INVOLVEMENT

A truly empowered team must play the lead role in designing its own measurement

system as it will know best what sort of measurement it needs to align with the

organization’s strategy.

REPORTABLE

There is no value for measurements that cannot be put into a simple and clear

report. Measurements must focus on most the critical items and not sacrifice quality

for quantity. Too much measurement may mean that teams end up spending too

much time collecting data, monitoring their activities, and not enough time

managing the project outcome.

FORWARD LOOKING

Unlike financial measurements that often record past accounting numbers, a good

Performance Measurement system should also capture its relevance to the

organization vision, validate its strategies and chart new directions. It should not

dwell in the past but focus on measurements that impact future deliverables.

OPTIMIZATION

Will improvement in one area of the organization be achieved at the expense of

another? If it does, how much sacrifice or risk should the organization take? The

Performance Measurement system should cover a comprehensive range of measures

and offer perspectives that provide an understanding of cause-effect relationship to

rearrange resources or priorities effectively. This usually requires a balance of


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financial and non-financial measures. For example, should a manufacturer delay

production dateline because a new supplier is coming with cheaper alternatives to

save cost? Or should an estate investor forgo the stringent, time consuming

regulatory and compliance checks before making the hot, time-sensitive deal that

has the potential to bring in millions in profit?

REALISTIC

The measures agreed by the employer and employee have to be ambitious and

challenging, and at the same time, be realistic and attainable. Too little means

employees fall into complacency; too much and they start to rebel or leave. This

requires a careful balance and is the manager’s call and responsibility if there are

disagreements.

MANAGEMENT COMMITMENT

Before anything can be done, senior managers need to buy-in to the change

management philosophy and adopt the performance-based management principles.

The focus should be on strategy and vision, and not day-to-day operational controls.

Managers should dictate strategic goals, ensure that each team understands how its

job fits into the strategy, and provide training so that the team can devise its own

measures.

3. INTRODUCTION TO STRATEGY

WHAT IS STRATEGY?

Strategy is a term that comes from the Greek strategia, meaning "generalship."

Strategy refers to a course of action. In other words, it refers to the selection of a

course of action out of the available course in order to achieve the long term goals


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through continuous and active interaction with the environment. There are various

definitions given by a great person and from that it is concluded that

Strategy is that which top management does that is of great importance to the

organization.

Strategy refers to basic directional decisions, that is, to purposes and missions.

Strategy consists of the important actions necessary to realize these directions.

Strategy answers the question: What are the ends we seek and how should we

achieve them?

Strategy —it is perspective, position, plan, and pattern. Strategy is the bridge

between policy or high-order goals on the one hand and tactics or concrete actions

on the other. Strategy and tactics together straddle the gap between ends and means.

In short, strategy is a term that refers to a complex web of thoughts, ideas, insights,

experiences, goals, expertise, memories, perceptions, and expectations that provides

general guidance for specific actions in pursuit of particular ends.

Strategy, then, has no existence apart from the ends sought. It is a general

framework that provides guidance for actions to be taken and, at the same time, is

shaped by the actions taken. This means that the necessary precondition for

formulating strategy is a clear and widespread understanding of the ends to be

obtained. Without these ends in view, action is purely tactical and can quickly

degenerate into nothing more than a flailing about.

Some Fundamental Questions

Regardless of the definition of strategy, or the many factors affecting the choice of

corporate or competitive strategy, there are some fundamental questions to be asked

and answered. These include the following:


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Related to Mission & Vision:

Who are we?

What do we do?

Why are we here?

What kind of company are we?

What kind of company do we want to become?

What kind of company must we become?

Related to Corporate Strategy:

What is the current strategy, implicit or explicit?

What assumptions have to hold for the current strategy to be viable?

What is happening in the larger, social and educational environments?

What are our growth, size, and profitability goals?

In which markets, business, geographic areas will we compete?

Related to Competitive Strategy:

What is the current strategy, implicit or explicit?

What assumptions have to hold for the current strategy to be viable?

What is happening in the industry, with our competitors, and in general?

What are our growth, size, and profitability goals?

What products and services will we offer and to what customers or users?


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How will the selling/buying decisions be made?

How will we distribute our products and services?

What technologies will we employ?

What capabilities and capacities will we require and which ones are core?

What will we make, what will we buy, and what will we acquire through

alliance?

On what basis will we compete?

Some Concluding Remarks

Strategy has been borrowed from the military and adapted for business use. In

truth, very little adaptation is required.

Strategy is about means. It is about the attainment of ends, not their

specification. The specification of ends is a matter of stating those future conditions

and circumstances toward which effort is to be devoted until such time as those

ends are obtained.

Strategy is concerned with how you will achieve your aims, not with what

those aims are or ought to be, or how they are established. If strategy has any

meaning at all, it is only in relation to some aim or end in view.

Strategy is one element in a four-part structure. First are the ends to be obtained.

Second are the strategies for obtaining them, the ways in which resources will be

deployed. Third are tactics, the ways in which resources that have been deployed

are actually used or employed. Fourth and last are the resources themselves, the

means at our disposal. Thus it is that strategy and tactics bridge the gap between

ends and means.


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Over time, the employment of resources yields actual results and these, in light of

intended results, shape the future deployment of resources. Thus it is that "realized"

strategy emerges from the pattern of actions and decisions. And thus it is that

strategy is an adaptive, evolving view of what is required to obtain the ends in view.

The driving forces on the basis of which banks formulate strategy are:

1.Operational

excellence:

Strategy is predicated on the production and delivery of products

and services. The objective is to lead the industry in terms of price

and

convenience

2.Customer

Intimacy:

Strategy is predicated on tailoring and shaping products and services

to fit an increasingly fine definition of the customer. The objective

is long-term customer loyalty and long-term customer profitability.

3.Product

Leadership:

Strategy is predicated on producing a continuous stream of state-of-

the-art products and services. The objective is the quick

commercialization of new ideas.

Each of the three value disciplines suggests different requirements. Operational

Excellence implies world-class marketing, manufacturing, and distribution

processes. Customer Intimacy suggests staying close to the customer and entails

long-term relationships. Product Leadership clearly hinges on market-focused R&D

as well as organizational nimbleness and agility.


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There are just some of question to be concerned about when managing strategy in

banks. Strategic management in banks is a huge challenge.

How will we attract and retain new customer?

How can we manage our strategy effectively in such a turbulent domestic and

global environment?

What are the strategic competencies that are critical for implementing our

strategic and how can we have sufficient capability in this area?

What is the software and IT infrastructure that will enable us to monitor our

strategic performance and execute more effectively?

The most important aspects of a strategic management process are analysis, actions

and the decisions. These could also be termed as being central to the entire process.

These three processes are also known as

Strategy analysis.

Strategy implementation and

Strategy formulation.

However, as far as application is concerned these three concepts can be said to be

dependent on each other. In the context of the business world it has been observed

that these concepts are not always exercised in a serial manner.


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4.STRATEGIES ADOPTED BY BANK TO IMPROVE

THEIR OVERALL PERFORMANCE.

The changing economic environment has a significant impact on banks and thrifts as

they struggle to effectively manage their interest rate spread in the face of low rates

on loans, rate competition for deposits and the general market changes, industry

trends and economic fluctuations. It has been a challenge for banks to effectively set

their growth strategies with recent economic market.

Banks rely on strategies to take certain crucial decisions and actions to accomplish

objectives efficiently. Strategic management principally involves long term

planning on the basis of the study of opportunities and threats in the external

environment with view to face competition. It encompasses all the key result areas

of performance. At times, strategies are crucial even for mere survival let alone

prosperity.

Globally, the banking sector has its own opportunities and threats and individual

banks have followed different strategies in different situations with varying degrees


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of success. There are various strategies that bank adopt, it can be quantitative,

qualitative and other.

QUANTITATIVE STRATEGIES:

Quantity addresses how much work the employee or organizations have produced.

Quantity measures are expressed as a number of products produced or services

provided.

A. PRICING OF PRODUCT:

In banks, pricing relates to interest paid by the bankers on deposits, interest charged

on loans, overdraft, cash credit, charges for various types of services rendered on

standing instructions given to the bank and commission charged.

Pricing policy of a bank is considered important for raising the number of actual

customers.

The potential customer or investors generally frame their investment decisions on

the basis of interest to be received on the investments. While framing a pricing

policy different pricing methods are used by banks namely,

Cost plus pricing: In this a detailed analysis is done.

STRATEGIES THAT

BANKS ADOPT

QUANTITATIVE

STRATEGIES

QUALITATIVE

STRATEGIES

OTHER

STRATEGIES


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Competition related approach: In this, the price is decided on the competitor’s

price.

Banks are required to frame two fold strategies. Strategies concerned with interest

and commission to be paid to the customers and interest or commission to be paid

by the customers for different types of services.

The banks also take the value satisfaction variable into consideration while

formulating pricing strategies. RBI has to be more liberal so that the commercial

banks make decisions in tune with the changing savings and investment behavior.

B.COST BENEFITS ANALYSIS:

It is more important for every bank to know about from where the money is

received and where it is spent i.e., they should be aware about their cost and

benefits. They should maintain balance between these two things. Rupee earned and

rupee spend are required for smooth running of business and financial soundness.

This type of watch can control and eliminate the unnecessary spending of banks.

Cost-benefit analysis suggests that a monetary value can be placed on all the costs

and benefits of a strategy, including tangible and intangible returns to other people

and organizations in addition to those immediately impacted.

Decisions are made by comparing the present value of the costs with the present

value of the benefits of the strategy. Decisions are based on whether there is a net

benefit or cost to the strategy, i.e. total benefits less total costs.Costs and benefits

that occur in the future have less weight attached to them in a cost-benefit analysis.

To account for this, it is necessary to discount, or reduce, the value of future costs

or benefits to place them on a par with costs and benefits incurred today.


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Although in practice monetary valuation is often difficult, it can be done and,

despite difficulties, cost-benefit analysis is an approach which is valuable if its

limitations are understood. Its major benefit is in forcing people to be explicit about

the various factors which should influence strategic choice.

Hence the balancing is must between these two factors for every organization

especially in the era of globalization where there are stiff competition among the

various market playerrs

C. SHIFTING TO FEE BASED SERVICES AND RESTRAIN ON FUND

BASED SERVICES:

Banks have been rapidly expanding the menu of financial services they offer to

their customers. This proliferation of services has accelerated over the years under

the pressure of increasing competition from other financial firms. It has also

increased bank costs and posed a great risk to bank failure. The new services have

has a positive effect in the industry through a new source of bank revenue called as

non-fund based income, which are likely to grow relative to the more traditional

source of bank revenue(interest income)

With the interest income coming under pressure, banks are urgently looking for

expanding fee-based income activities. Banks are increasingly getting attracted

towards activities such as marketing mutual funds and insurance policies, offering

credit cards to suit different categories of customers and services such as wealth

management, equity trading, advisory services regarding underwriting, guarantees,

letter of credit and electronic bill presentation and payment (EBPP) services. These

are indeed proving to be more profitable to banks than a plain vanilla lending and

borrowing i.e. fund based services.


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D.) REDUCTION IN NPA:

The major concern of the Indian banking industry currently is that it has a high level

of non-performing assets. Banks have realized that high level of NPAs in their

credit portfolio is a drag on their profitability which is already under strain. They

have initiated various strategies and action points to bring down their level of NPAs

and have achieved some degree of success in terms of recovery and upgradation of

their existing NPAs. The main reasons responsible for such situation include slow

economic and industrial growth, slump in capital market, financial indiscipline,

willful defaults by the borrowers, overburdened and slow judiciary, competition

faced by local industries from the multi-nationals, lack of support to the borrowers

from the banks in time of need etc.

The following strategies have successfully been tried by some major bank in

bringing down their NPAs.

1. Accounts Creation of proper data base:

2. Creating awareness among bank staff:

3. Strengthening pre-sanction appraisal:

4. Post sanctioning monitoring and follow up system of loan

5. Rehabilitation of potentially viable sick units.

6. Review and renewal of loan accounts.

7. Meeting with the borrowers

8. Checking slippage of standard accounts to NPA category.


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9. Recovery/legal department.

10.Recovery of dues through compromise settlements.

11.Bringing attitudinal changes.

12.Writing off bad debts

13.Involvement of the staff in recovery process.

14.Filling claim cases with DICGC (Deposit Insurance and Credit Guarantee

Corporation) and ECGC (Export Credit Guarantee Corporation)

E.) ASSET LIABILITY MISMATCH:

Asset liability management, i.e. profit and risk control which is unique to the

banking industry. Asset-liability mismatches exposes banks to various types of risks

i.e. risks of illiquidity and insolvency; risks arising from globalization and

deregulation. Risk management is a continuous process of controlling assets and

liabilities in terms of size, maturities and yields. As operations in the financial

market become varied and complex, banks have to equip themselves with a variety

of skills and appropriate technology. The RBI has issued guidelines to banks in

April 1999, for asset liability management which would help the bank management

to meet the challenges. Banks are required to prescribe risk parameters and establish

effective control systems.

F.) MARKET SEGMENTATION:

In banking services, the banks are expected to satisfy rural customers, urban

customers, high earning and low earning customers, small-scale and large scale

entrepreneur and so on.


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Hence segmentation of market is considered to be important.

According to Philip kotler, “market segmentation is the sub-division of a market

into homogenous sub-sets of customer were any sub-set may conceivably be

selected on a market target to be reached with a distinct marketing mix.”

Since the bank have to deal with different types of customers from different fields

and localities, banking service need segmentation.

The purchasing power of potential customers is different. In respect of term deposit

of different maturities or deposit schemes the potential customers are required to be

influenced. These potential customers may be located in some pockets of the urban

areas.

In the Indian setting we find the emergence of rural market which is wider. Here it

is necessary that the segmentation should in tune with the changing socio-economic

condition of the rural users.

Therefore market segmentation not only from the view point of expanding market

but also with the motto of satisfying the user. If the marketing decisions of the bank

are on the basis of micro-level market segment, then only a fine blending of service

and profit elements are possible.

G.) DOMESTIC MERGERS, ACQUISITIONS AND ALLIANCES

Banks can also grow in their domestic markets via mergers and acquisitions

(M&A’s). The attractiveness and feasibility of this option depends on the

circumstances in the country. These circumstances include elements such as

concentration, diversification possibilities, synergetic opportunities and the attitude

of the supervisory authorities.


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Domestic M&A’s can deliver both cost and income synergies. Cost synergies are

reached mostly when two banks merge, since they both have the same type of

support departments, ICT systems and distribution channels. Intersectoral mergers

(for instance banks with insurance companies) show less promising cost synergies,

because of the complexity of the integration process and cultural differences. These

intersectoral mergers do show the potential for revenue synergies because the

different products of the merged companies can be sold through the distribution

channels of both institutions. However, in practice, these synergies are hard to

achieve and the costs of the merger often exceed the revenue synergies. Forming an

alliance can be an attractive alternative. The alliance offers the possibility to

achieve income synergies without the expensive integration process. Alliances are

often complemented with cross-shareholding to underline the dedication to the

cooperation. Alliances that work out well may eventually lead to full

mergers.HDFC merged with centurion bank and it lead to success.

QUALITATIVE STRATEGIES

Quality addresses how well the employee or groups performed the work/or the

accuracy or effectiveness of the final product. Quality refers to accuracy,

appearance, usefulness or effectiveness.

Today’s pacesetter companies do not view their strength in enabling growth in

terms of the quantity of management of the hierarchical leadership of an earlier day,

instead, they emphasize the quality of management, which recognizes and is

measured in terms of leadership and networking capability foe focusing a

company’s total resources on sustaining business growth.


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They implement this result through effectiveness in developing and deploying

management capital’s intellectual, technical, human information, and other

resources in integrating the banks: hard” and “soft” assets. This takes place through

the processes, tools, and strategies that help each man person in the bank think,

learn, act, and make decisions about how he or she both or individually and as part

of team can help provide the superior value for customers and, consequently, for

investors that meet today’s accelerating business demands. Following are the

measures that are following and they need to follow:

A. SERVICE DESIGN AND DELIVERY STRATEGIES IN BANKS:

New distribution channels have transformed the world of banking. ICICI bank was

the first private sector bank to launch its net banking services called infinity. It

allows user to access account information securely, request cheque books and stop

payment, and even transfer funds between ICICI accounts. The services of a bank

are only a part of service spectrum. In India even the NBFC’s are offering

commercial banking services and commercial banks are offering merchant banking

services.`

B.CUSTOMER RELATIONSHIP MANAGEMENT:

Customer relationship is the base on which the entire structure of banking reset.

When we look at the cost and returns factor in building up customer -relationship

management, we find that the initial cost to develop customer relationship is always

higher than revenue. However, as the relationship grows new demands will appear

and then the incremental revenue would be higher than the incremental cost.

Indian banks have now started to recognize superior customer care and maintenance

of well-greased relationship with customers as important tools to profitability. With

the growth of awareness and rapid imbibing of the internet culture. Common man is


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not ready to accept anything less than the best. It incorporates such seminal

concepts such as the sales culture, one to one marketing, data warehousing, data

mining, customer segmentation, loyalty programs and cross-selling.

There was survey conducted which reveals information on the CRM software used

by various banks for managing customer records and customer interaction

information. Only three foreign banks have installed CRM packages for

maintaining customer details and the packages used are: Citibank: Seibel; American

express: Seibel; ABN amro: PeopleSoft. The Citibank system has been equipped

with the “sales” module for providing customers readily available information

about their assets and liabilities with the bank. It also enables the Citibank

relationship managers in maintaining a history of contacts with their customers thus

assisting them in serving better. Though the other banks surveyed have started

implementing CRM they have not implemented any technology or CRM software

for managing customer details and services. The remaining banks surveyed have

also initiated CRM in various forms, i.e., providing efficient services to customers

through mobile telephony or the internet but still have to adopt a technology or

software for the same.

Among public sector banks, bank of India is already in the process of adopting a

software package; either Seibel or SAP. SBI uses software developed by B K

Systems of Hyderabad but those services cover only it’s corporate and NRI clients.

The central bank uses a software SWIFT but it is used in managing its foreign

accounts and transactions.

Business strategies developed to increase customer acquisition and retention is

shown in the graph below (on a scale of 1 to 8 with 8 being the most important

marketing strategy).


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Technological up gradation is identified as one of the most successful strategy in

customer acquisition and retention followed by expansion of ATM networATM

network, advertisements and additional sales force.

Strategies adopted by bank are:

To raise the level of customer satisfaction, banks will have to set up CRM groups or

CRM departments.

Banks have started selling their customer online banking and consultation services

to add value to their services and satisfy their customers. But once a customer is

online, it is harsh to keep them loyal to the banks.

Most banks are focused upon re-engineering the existing and introducing newer

technologies like Internet Banking, ATM, Phone Banking and VRU (Voice

Response Unit).

With the advent of newer technologies there is lack of personal touch and a

customer can be lured by big financial institutions somewhere at the other end of

the world providing services better than almost any local bank. But of late, banks

have realized that successful migration of customer’s the internet lies in transferring

the offline relationship to online environment


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C. STAFF RETENTION/ HUMAN RESOURCE DEVELOPMENT

RIGIDITIES

HRD is the most important need for a service industry like banking. The banking

industry being largely in the public sector, certain rigidities developed in the HRD

within banking sector. Apart from being the preferred employer for the educated

manpower, public sector banks followed a hierarchical structure, which gives

preference to seniority over performance.

The approach to human resources management in banks will have to change in tune

with the fast changing banking environment at home and abroad. Banks can

improve their existing practices of recruitment, training and redeployment.

For customer retention it is equally important that first staffs are retained. The

theme of the service-profit chain, a model depicted below, conceived by Leonard

Schlesinger and James Keskett of Harvard Business School-“Employee satisfaction

drives customer satisfaction and thereof profits” very clearly states how STAFF

SATISFACTION leads to customer satisfaction and customer retention.

SERVICE PROFIT CHAIN

Staff Satisfaction

STAFF

RETENTION

satisfactionn

External

Service quality

PROFIT Customer retention

Customer satisfaction

Internal support


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Thus the fact that customer satisfaction is derived by staff retention is recognized by

banks today. But now banks are giving a renewed look to their HR policy by giving

emphasis to:

Good, timely and appropriate training.

Performance based compensation.

Reorienting the attitude and latititude of the staff to solve customers’ problems.

Service companies have found that if the frontline people mainly sales people,

technical staff and managers have authority to response customer’s problems, two

things occur. First, staff feel empowered, more satisfied, they stay with the business

which keeps staff turnover cost down. Secondly, the span of control (the ratio of

staff to managers) also increases.

So importance of ‘Staff Retention’ for service profit chain cannot be ignored at all.

Further, the customer facing team should be sensitive to customer expectations at

multiple touch points of the bank. This will help deliver a unified and consistent

experience across all these touch points.

D.) TRAINING:

Training is essential for improvement in the banking sector. Information technology

and internet revolution have made available avenues of training and education that

combine economy, flexibility and convenience. To sustain performance and

increases market share, new and old players alike need to have a long term strategy,

in which training would be crucial factor. Old players in the market especially need

to invest a huge amount of money not only foe putting in place an information

technology infrastructure but also for training its ageing manpower.


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Today’s trend is towards affordable, continuous training in proven business skills

and knowledge duly supplemented by in house, on-demand, self-directed and

video-based mini seminars. Globally, top companies in very field invest a minimum

of 3 percent of their revenues on training and in return they get US$3 to 300 for

every dollar invested. Viewed in this light, valuable business skills and knowledge

come absolutely free. This clearly indicates that training holds the key to success.

A leading international consultant has developed a web-based training curriculum

for its client to train the latter’s employees across the globe. Offering training over

internet also help employees to have access to training facilities at their work place

itself.

There are techniques through which training can be provided namely;

Information technology based training: taking a cue from the aforesaid trends,

HR professionals and training managers of domestics banks in India need to invest

in modern techniques of training like Computer based training (CBT), Web based

training, self- development to enable employees learn the skills without being away

from the customers.

Self-training techniques: There is a strong case for domestic banks to seriously

consider self-training techniques by encouraging their employees to upgrade their

skills because the requirement of multi-skilled employees, especially in the

financial sector, is increasing as players in the financial sector are looking for

diversification of their activities to enhance their profit margins and overall growth.

Some banks have initiated innovative measures like encouraging their employees to

broad base their knowledge and upgrade their skills by granting them financial aid

to purchase books, newspapers, magazines and CD-ROMs on banking related

subjects.


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Retraining: retraining focuses on the basic competencies needed in a new or

redesigned job and addresses advanced-level technical skills. It helps banks in

redirecting their human resources to address skill imbalances or projected skill

shortages resulting from internal and external factors. It helps banks to expand

knowledge and skills of employees through multi-skilling and cross training and

helps stabilize the work environment. It can also build employee morale which was

adversely affected by the exodus of several skilled personnel from the scene in the

wake of VRS.

E.) ORGANIZATIONAL STRUCTURE:

An enterprise-wide technology initiative is not about technology alone. Banks have

to consider organizational redesign, change management and above all else, a

business plan to back it up. A simple rule of organizational redesign is ‘structure

follows strategy’. This means that the structure of the organization supplements the

strategy. Organizational redesign is not at one time activity at the start of the

project, it is ongoing process.

The transformation of an organization has many elements to it; technology is only

one of these. Often, organization focuses on technology alone. For instance, it is

very important to have effective teamwork at the senior management level. In the

face of rapid business changes, this is a big challenge. Further, there is a compelling

need to sustain innovation without losing performance discipline. At the same time,

it is critical to ensure minimal impact on customer service. There is also need for

open communication within the bank.

F.) CORPORATE GOVERNANCE:

Corporate governance has its backbone a set of transparent relationships between an

institutions management, its board, shareholders and other stakeholders. It, is


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therefore needs to take into account a number of aspects such as, enhancement of

shareholder value, protection of shareholder’s rights, composition and role of the

board of directors, integrity of accounting practices and disclosure norms and

internal control system. In a service industry like banking, corporate governance

relates to the manner in which the business and affairs of individual banks are

directed and managed by their board of directors and senior management. It also

provides the structure through which the objectives of the institution are set, the

strategy for attaining them is determined and the performance of the Banks is

monitored.

G.) ORGANIZATIONAL PERFORMANCE TARGETS:

For performance measurement system banks need set their organizations

performance targets. If an organization were to decide to measure its performance

against (let's say) the number of clients served in a year, then it would not be

surprising if the organization were to establish a target related to that measure. The

organization might set a target of, say, "service provided to 50,000 clients in 2008".

This target (together with, presumably, a number of others) would become a basis

for assessing the quality of the performance of the organization as a whole, or of a

unit within the organization, or even of particular employees. The implication of

setting a performance target is that failure to meet the target implies substandard

performance unless a satisfactory explanation can be provided as to why the target

was not met.

Performance targeting has an important place in the organizational manager's

toolkit. There is no reason to doubt that, when used properly, targeting can make a

positive contribution to organizational performance. However, the assumption that

organizations will indeed make proper use of performance targets is not always well

founded. Designers of performance targeting schemes -- if they wish to add value to


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their organization’s performance -- must bear in mind the limitations of

performance targeting, and the potential of targeting schemes to cause significant

and unintended perverse outcomes. Experience has shown that when targeting

schemes are not carefully designed and implemented, they risk causing more harm

than good.

OTHER STRATEGIES

Apart from quantitative and qualitative strategies there are other strategies that bank

follows and should follow in case if they are not following. The various other

strategies are as follows:

Recovery strategy.

Turnaround strategy.

Promotional strategy.

Funding strategy.

I. RECOVERY STRATEGY :

The gross non performing assets of commercial banks and development financial

institutions have reportedly crossed the rupees one lakh twenty thousand crore

mark. Commercial banks have made various efforts for recovery, like out of court

settlements, one time settlements etc., with a view to keep gross NPA figure low.

Present NPA is around 2 to 3%


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Some analysts and rating agencies however maintain that these figures have been

significantly underestimated through evergreening; rescheduling, restructuring etc.

the least effective of all recovery measures is obviously the judicial route, thanks to

a tardy and outdated legal system.

The recent ordinance (securitization) and reconstruction of financial asset and

enforcement of security interest ordinance 2002) has paved the way for the creation

of securitization and asset reconstruction companies, besides empowering banks to

take over the management of a defaulting borrower company besides its secured

assets for realization of loan amounts, without court intervention. This ordinance

will have a great ‘deterrence value’ as willful defaulters lose the protection of legal

delays besides the privilege of asset stripping. Quite a few FIs and banks have

already initiated measures to recover measures to recover their dues from chronic

defaulters. ICICI bank, and IDBI and IFCI, for instance, have sent notices to 22

companies which collectively owe them Rs. 1200 crore. In addition, IDBI has

issued notices to 17 borrowers for an amount aggregating Rs. 1640 crore. The State

Bank of India has issued notices to about 70 defaulters while others are also in the

process of doing so.

Hence bank has to properly adopt recovery strategy so that at the recovery stage

performance is maintained.

II. TURNAROUND STRATEGY

The overall goal of turnaround strategy is to return an underperforming or

distressed bank to normal in terms of acceptable levels of profitability, solvency,

liquidity and cash flow.


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stabilisation

Crisis management

Turnaround strategy is described in terms of how the turnaround strategy

components of managing, stabilizing, funding and fixing an underperforming or

distressed company are applied over the natural stages of a turnaround.

When bank fails or is at the verge of failue bank adopt the turnaround strategy.the

followinf figure shows the recovery of bank while applying turnaround startegy.

III .PROMOTIONAL STRATEGY

Promotion has different aspects for different industries, products and services. Its

final goal is to communicate positive word of mouth among existing and potential

customers about the corporate, product and service. In banking the customers must

be ensured that services provided by a particular bank have been designed to give

them maximum value of their money. In brief, it can be said that in India wherever

the dilemma of private and public sector comes always two things are considered.

Public sector is more reliable but not so good in the quality and innovativeness.

Private sector is not considered so reliable, there may be hidden charges in the

services and false and misleading information in the advertising but they are better

in the service quality. Private sector banks must be more true and reliable first.

They have to win the hearts of the customers, after that they will be able to win

minds as well. In traditional tools of promotion both sectors' banks are almost same.

Private Sector banks are adopting more push strategies to attract and catch the

regrowth

http://www.turnaround-sa.com/turnaround%20stages/turnaround%20stages.php

http://www.turnaround-sa.com/turnaround%20strategy/turnaround%20strategy%20components.php

http://www.turnaround-sa.com/turnaround%20strategy/turnaround%20strategy%20components.php


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customers. This creates the difference between promotional strategies adopted by

Public and Private Sector Banks

Promotional Strategies by Public and

Private Sector Banks

Public Sector Private Sector

Promotional Tool Bank Bank

Advertising on telivision Yes Yes

Newspapers

Personal Selling/ No Yes

Personal Contact.

In Journals and magazines. Yes Yes

Tele Calling by Sales persons. No Yes

Outdoor Advertising, hoardings. Yes Yes

Schemes/Gifts/Prizes No Yes

for Customers.

Public Relations/ Yes Yes


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events/Programmes.

Online Marketing/e-mail. Yes But Few Yes

Pamphlets/Propaganda. No Yes

Letter/Mail/ with No Yes

Relevant Material.

Publishing News in newspapers. Yes But Few Yes

Banks use different promotional strategies like personal selling, advertising,

discounts, melas etc. For example, banks like HDFC and ICICI have acustomer care

executives who contact the customers either personally or on the phone and

recommend their new services/products. The SBI held home losn melas and property

fairs across the country as the lending rates plummeted and the market became very

competitive.

IV.FUNDING STRATEGY

The recent financial crisis has important implications for the feasibility of different

banking models. On the funding side, the crisis has clearly exposed the dangers of a

bank's excessive reliance on wholesale funding

Generally speaking, banks source their funds from deposits (50%) and through

wholesale funding, comprising, short-term wholesale funding (25%) and long-term

wholesale funding (25%), in both the domestic and global markets (these

proportions will vary from bank to bank). Short-term funding relates to borrowings

for up to 12 months while long-term funding includes borrowings of greater than 12

months.


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The price that banks pay for funds depends on many factors. These include changes

in the official cash rate, competition, international events, the credit rating of the

bank and the supply of wholesale funds. When the term of any funding arrangement

expires, either in domestic and global markets, banks have to re-finance. Since the

onset of the global financial crisis, wholesale funding costs have increased

significantly. Furthermore, interest rate volatility has increased in these markets

and it is widely reported that considerable uncertainty will remain over the next

year. Due to the protracted nature of the sub-prime crisis, pressures on financing

costs from the wholesale market continue

In the current environment, many banks have come to the realization that they have

little control over the yields on their assets as they are very much a function of the

competing market place (i.e. commodity like). In addition, they are better

understanding that the most expensive funding source can often be local, rate

sensitive, depositors who want the best rates but, at the same time, want to keep

their funding flexible and in short term investments. Is this type of customer a

profitable relationship for the bank, or would the bank be better served to

selectively reduce rates and allow rate shoppers to shop somewhere else?

This raises the question as to what the right mix of funding should be for any

particular bank. What should the mix be between retail deposits and wholesale

funding that provides the overall lowest cost of total funds; but provides the

flexibility to manage the liquidity and interest rate position of the balance sheet?

Most banks that have traditionally relied on customer-only deposits to fund their

balance sheets are at a tactical disadvantage. With the preponderance of new loan

assets being fixed rate for at least three to five years and depositors wanting to keep

maturities short, there is little ability for a bank to effectively manage their interest

rate risk position and net interest margins.


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What most banks need is the ability to acquire funding that is not only cost effective

at the margin, but, also has the maturity characteristics that best meet the interest

rate characteristics of the balance sheet. Wholesale funding in the current

flat/inverted yield curve environment can meet these requirements.

While a bank’s core customer base continues to be the “franchise,” wholesale

funding strategies, when combined with selectively reducing rates on higher cost

local deposits, could very well result in lower overall funding costs and reduced

balance sheet risk.


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5.SURVEY WITH QUESTIONNAIRE

STRATEGY ADOPTED BY BANK OF BARODA TO IMPROVE THEIR

OVERALL PERFORMANCE

BANK OF BARODA–THRUST ON GROWTH WITH QUALITY.

Bank of Baroda Started in 1908 from a small building in Baroda to its new hi-rise

and hi-tech Baroda Corporate Centre in Mumbai, is a saga of vision, enterprise,

financial prudence and corporate governance.

Mission statement

To be a top ranking National Bank of International Standards committed to

augmenting stake holders' value through concern, care and competence.

Bank’s corporate goals and strategy

“To maximize quality growth and profit through enhanced customer orientation

with prudent risk and liquidity management policies and practices in our endeavor

to consolidate Bank’s financial strength”


65

During the year 2008-09, the Bank’s focus was mainly on implementing effective

strategies to optimize human resource management in a highly motivating work

environment, drawing maximum mileage out of the available Information

Technology infrastructure and imbibing a full-fledged marketing culture to promote

a sense of professionalism in approach and attitude.

During the year 2009-10, the Bank would continue to perform with a

thrust on “Growth with Quality” by focusing on low-deposits by further reducing

the dependence on bulk Business and by protecting the asset quality with a firm

control on the process of credit origination.

The Bank’s business plan and broad strategy in the year 2009-10 to achieve its

corporate goals, objectives and to explore newer business opportunities in the

domestic as well as overseas market would be as under:

Reorienting its systems and procedures towards customer convenience and

enhanced customer satisfaction.

Formulating and adhering to the best corporate governance practices with an aim

to set high standard of ethical values, transparency and disciplined approach to

achieve excellence.

Focusing on a consistent and broad-based resource mobilization plan.

Enlarging the base of retail customers by leveraging technology and taking newer

technology based initiatives.

Diversifying the loan book and managing the credit risk effectively.

Penetrating deeper into hitherto unbanked centres/customer segments.


65

Aggressively canvassing non-fund based business so as to improve the share of

fee-based income

Maintaining a fine balance between the size and the strength of the Balance Sheet

by managing Net Interest Margin (NIM), Risk Profile of the Bank and improving

the Cost-Income Ratio.

Enhancing the image of the Bank as a Customer Centric Organization.

During the year 2008-09, Bank of Baroda enhanced the strength of its balance

sheet and proved its ability to deliver strong results even during turbulent times.

With a sustained thrust on risk management, technology, marketing and customer

centricity, it is well positioned to take advantage of the future opportunities

I had visited Bank of Baroda (Altamount road branch, Grant road.) on 19/09/09 and

had a conversation with bank’s branch manager S.P Dhingra which is as follows:

Q.) According to you what is overall performance for your bank?

Basically there are 5 parameters i.e.

Increase in deposit.

Increase in advances.

Decrease in NPAs.

Profitability.

Increasing non-fund based services.

We give more importance to quality as quality is important for long term growth.


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Q.)What are the various strategies adopted by bank for better customer satisfaction?

Actually there is no one specific strategy. For us ‘Customer is Boss’ and you

know that we have to listen to our boss. We don’t have separate CRM department,

it is partially there for wholesale banking and large corporate accounts.

The bank has taken a series of customer centric technology initiatives in the past

few years. The transaction processing system has stabilized under CBS (Core

Banking Solution) environment. The alternate e-delivery channels are made

available to the customers. The banks ATM network expanded to 1,179. The bank

launched several new IT products and services such as phone banking service,

corporate cash management system, payment messaging solution and global

treasury etc to increase customer convenience and also to reduce the transaction

cost. Thus, many steps have been taken by the bank to serve the customer with

speed and efficiency.

Q.) How does your bank evaluate the performance of the employees?

We follow Balance Scorecard method to measure the performance of officers.

The superior authority also keeps track of the performance periodically and uses his

experience and expectation to coach and motivate his subordinate for further

improving upon the performance levels. Managing the performance of employees

and manager is most important. Performance management is not a one time activity

it is a composite system composed of goal setting, tracking changes, coaching,

appraisal, feedback and employee development. The figure below shows these

activities which must happen on acyclic and ongoing basis.

Tracking progress together


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Mutual goal setting motivate (begninng of year) Review (mid year) employee

research and coach development

Appraisal year end tracking progress together

Q.)Does your bank have separate HRM department?

Yes, we have separate HRM department called HRnes (Human Resource

Network for employee services). It is a web enabled enterprise wide HR solution

launched on 26.11.2007. Further, additional employee- friendly functionalities were

added to enable the employees to submit online applications for request transfer,

promotion etc.

Q.)How do you manage the various inherent risks?

Bank of Baroda has a robust risk management system to ensure that the risks

assumed by it are within the defined risk appetites and are adequately compensated.

Liquidity Risk: The bank’s ALCO (asset liability committee) has the overall

responsibility to monitor the liquidity risk.

Credit Risk: Bank has adopted various credit rating models to measure the level of

credit risk in a specific loan transaction.

Market Risk: The bank has an asset liability policy to address the market risk. These

policies comprise management practices, procedures, prudential risk limit, review


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mechanism and reporting system. These policies are revised periodically in line

with changes in financial and market conditions.

Operational risk: the bank has ORMC (operational risk management committee)

who has the authority and responsibility of monitoring the operational risk of the

bank.

Q.) What is your bank’s future planning?

We plan to increase the following profitability ratios:

Net interest margin (at present 2.91%)

Interest spread (at present 2.64%)

Gross (operating) profit (at present 2.22%)

Return on average assets (at present 1.09%)

Credit deposit ratio (at present 82.36%)

Capital adequacy ratio (at present 12.88%)

Yield on advances (at present 9.50%)

To decrease following ratios

Operating expenses (at present 1.84%)


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Cost income ratio (at present 45.38%)

Cost of deposit (at present 5.71%)

The recent strategy of our bank is to promote or recruit the young talents.

In its relentless striving for quality perfection, the Bank secured the ISO 9001:2000

certifications for 15 branches. By end of the current financial, the Bank is targeting

54 more branches for this quality certification.

At Bank of Baroda, change is a journey. It has a beginning. There will be no end. It

will be a long and difficult march. And the Bank will emerge stronger, more

resilient and positioned to become India's first bank of truly global standards.

6.BARRIERS FACED BY BANKS WHILE

IMPLEMENTING STRATEGIES

The road ahead will be tough and rough but when the roads get tough, only the

tough get going. In fact, internal risk management, financial inclusion, managing

human capital, high intermediation costs, low productivity, better corporate

governance and improving customer service, believe industry analysts, remain

major hurdles for the Indian banks to overcome or become global comp[editors.

Besides, they feel, the banking community needs to learn a lesson from the recent

US subprime crisis and bank going bankrupt due to operational inefficiency.

The road to perfection by banks wasn’t free from hurdles. Since the initiation of

financial sector reforms in the early ‘90s, the Indian banking sector has undergone


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several changes. Private sector banks, led by ICICI bank, HDFC bank and axis bank

had to face many stumbling blocks which led to the introduction of various

innovations and technology changes such as migration from legacy systems- to

attract and reach customers. But even as some key obstacles were overcome, there

are many issues as follows which the banks need to look into to get on to a high

growth competitions.

1. COMPETITION

The level and intensity of competition has increased in the financial services

industry as banks and their competitors have expanded their service offerings. The

local bank offering business and customer credit, savings and retirement plans and

financial institutions, credit unions, securities firms, financial markets, insurance

companies, etc. for the bank’s core deposit base. Commercial paper, medium term

notes and other financial market innovations challenge the banks traditional lending

products. There has been a spectacular proliferation of new financial instruments

like zero coupon bands, collateralized mortgage obligations, Eurobonds and all

kinds of derivatives. The competitive pressures have acted as a spur to develop

more services for the future. With competition hotting up, understanding the needs,

spending and consumption patterns of customers will be critical for a bank to

remain competitive in the market.

2. FINANCIAL INSTABILITY

The instability of the financial system in the case of some countries highlights the

needs for further strengthening of international financial system particularly cross

border capital flows.


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3. LARGE NUMBER OF PLAYER IN RETAIL FIELD

While there is a room for large number of player in retail field, banks are better

placed due to risk dispersion and better quality of assts. Consequently constant

refinements in the nature and pricing of retail products, delegation of powers,

simplified sanction and disbursement procedures, and removal of bottlenecks have

been effected to achieve a healthy growth. There is no doubt that retail banking has

to be central to the development strategy of banks. But the challenge now is to

acquire a more flexible, customer centric business model while simultaneously

achieving economies of scale.

4. PENETRATION OF BANKING SERVICES

The penetration of banking services to Indian households stand at a mere 35.5%.

According to the data released by the Census office, even relatively prosperous

states like Maharashtra,Gujarat and Karnataka have less than half of their total

households operating a bank account. Delhi was ranked 8th with only 51% of the

population having access to banking facilities.

Some of the efforts highlighted to increase this penetration level were:

Tapping the rural market

It is time that Indian banks capitalize upon the untapped potential of the rural

markets. Rural India is now being viewed more as an opportunity than as a

challenge. Rural markets are difficult but profitable market improving macro

indicators like better education, higher income levels and comfort with technology

clearly indicates the rural India’s potential of massive economic upsurge. NBFCs

can actually help banks achieve financial inclusion and increase credit growth.


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Opening more branches in Tier II and Tier III towns

Fierce competition in the business of banks in metro cities has brought into sharp

focus the untapped potential in the emerging markets of the Tier II and Tier III

cities across the country. In fact, analysts have forecasted that the next retail boom

is waiting to happen in these smaller towns and cities, as urban markets have now

saturated. Many public sector banks are now enhancing their focus towards the Tier

II cities, as most of them have lost their considerable market share in the metros to

their private sector and foreign counterparts.

5. GEOGRAPHICAL EXPANSION AND CONSOLIDATION

The geographical expansion and consolidation of the banking units have expanded

beyond the boundaries of a single nation to encompass the entire globe. Today, the

largest banks in the world compete with each other for business on every continent.

Size does matter. Especially if banks have to make their presence felt in the

overseas market and consolidation will help in achieving size. Because, the bigger

the bank, the easier it is raise cheaper resources. Also, only if a bank has a huge

balance sheet will it be able to fund big ticket loans.

India may not be all that bad in terms of the size of the banks when compared to

many other emerging market counterparts. It is imperative for the banks to grow

their business in India first, before they look at competing with foreign banks. Once

Indian banks have achieved size and strength in the domestic market, they would be

better placed to compete with foreign banks.

For example:


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Chinese banks, even as they are three times the size of big banks in India, they do

not have significant overseas presence. Thus, in the current scenario Indian banks

can only look at competing with banks in the under-developed and developing

economies.

6. BASEL II NORMS

For the uninitiated, Basel II uses a ‘three pillars’ concept-minimum capital

requirements (addressing risk) (supervisory review and market discipline (to

promote greater stability in the financial system). It is part of the original Basel

Capital Accord that was released in 1988, under which regulatory authorities within

the G-10 countries made a commitment to specify a minimum capital requirement

for banks, and later implemented by countries outside the G-10 as well.

Basel norms are vicious circle. It will only widen the gap between the risky banks.

There will be a lot more transparency, but banks will need to keep modifying their

strategy to make sure that they meet capital requirements. Banks will become more

quality conscious and the onus will be to tap enough creditworthy customers.

For example:To be able to maintain a capital adequacy of 12%, advocated by

advanced Basel II norms. Indian banks are required to generate Rs 5, 68,744 crore

over the next five years. While public sector banks will have a capital requirement

of Rs 369115 crore 64.9%), the private sector and foreign banks will have to infuse

around Rs 199629 crore (35.1%). This is likely to result in bank merger and

acquisition opportunities, Basel II guidelines will force banks to become more

efficient from improved operational and credit risk management practices.

7. ECONOMIC RECESSION


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Economic recession coupled with increased competition have forced banks to

reduce their charges in the form of appraisal fee, commitment charges,

documentation charges, up front charges and remittance charges etc. to attract new

customers and have an edge over other banks. All these factors are putting the

‘other income’ of banks also under pressure.

8. FINANCIAL INCLUSION:

In the history of human civilization it has always been the technology which has led

to mass availability of products and services. Same is the case for banking services.

We are in the midst of the most exciting period of human civilization when two

billion of population is expected to move ‘up’ from below poverty line to above

poverty line (BPL). Majority of these will be in this sub-continent and banks will

have an opportunity to participate in this process, which will bring sustainable

peace and prosperity to the mankind.

For achieving the goal of Financial Inclusion, experts have recommended the

Business Correspondent / Facilitator (BC/BF) model. However, some recent studies

have pointed out that the BC model at the initial stage may not be commercially

viable due to a high transaction cost for the banks and customers. Here, the

appropriate use of technology can help in reducing the transaction cost. The need of

the hour is to develop and implement scalable platform independent technology

solutions which, if implemented on a larger scale, will bring down the high cost of

operation. Technology, thus, really holds the key for financial inclusion to take

place on an accelerated scale.


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The need of the hour is leveraging technology in Indian banking for providing

affordable and cost-effective banking services to the masses through multi-delivery

channels.

9. RISK :

While implementing strategies, banks have to face various kinds of risk. It is the

inherent part of every bank. While performing banks mainly face three kinds of

risks namely,

Credit risks

Market risks

Operational risks.

CREDIT RISK: the risk arises due to default of borrower is called credit risk. The

recent US example of sub prime was due to the default of borrower in repaying the

principal amount. Because of this the performance of many banks in US was

hampered and many banks had filed bankruptcy.

How to minimize credit risk

Pre sanction ongoing post review mechanism


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appraisal technique sanction monitoring

. Internal audit External audit

ON –SITE OFF-SITE [Personal visit, stock audit [stock statement, conduct

Factory audit] of account]

MARKET RISK: It is the risk caused due to market fluctuating. Basically, bank face

interest rate risk, liquidity risk due to market fluctuation. Because of this reason,

bank always have to design their strategy accordingly. Market fluctuation lead to

inconsistency in performance

How to minimize market risk?

cash flow analysis forecasting gap anlaysis

OPERATIONAL RISK: Failure in this risk arises due to people, process, and

system in bank. Operational risk has more affect on bank performance.

How operational risk can be minimized


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Motivating employee

Training

Proper internal control system.

Technological upgradation.etc.

10.FINANCIAL BARRIERS

These include budget restrictions limiting the overall expenditure on the strategy, financial restrictions on specific instruments, and limitations on the flexibility with which revenues can be used to finance the full range of instruments

11.POLITICAL AND CULTURAL BARRIERS

These involve lack of political or public acceptance of an instrument, restrictions imposed by pressure groups, and cultural attributes, such as attitudes to enforcement, which influence the effectiveness of instruments.

7.FINDINGS

This project gives detailed report on:


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Concepts, measures, indicators of performance.

Strategies adopted by banks to perform in a consistent manner.

Issues/challenges faced by bank in implementing strategies.

Banks adopt separate strategies to improve its both qualitative and quantitative

performance. But nowadays banks are giving importance to quality.

Today Pacesetter Company do not view their strength and performance in

enhancing growth in terms of quantity of management of hierarchical leadership of

an earlier day, instead the emphasis on quality of management.

The channel through which banks improve their performance product

development, supply management, operation effectiveness and quality as well as

others.

Banks are now devising various non quantitative determinants to help it improve

the service quality a well as their performance. Some of the areas on which banks

focuses include branch premises and customer lounges, ATM, technology, publicity

and banks staff members.

Financial; performance of banks is determined using various ratios like debt-

equity ratio, profitability ratio, return on asset, return on investment etc.

The most commonaly cited ratio today is the efficiency retio, which is equal to

noninterest expense divided by the sum of net interest income and noninterest

income. The lower the ratio, the better a bank’s performance—ceteris paribus—

because it indicates how much a bank must pay in noninterest expense to generate

one dollar revenu of operating revenue. Many banks cite this ratio along with return


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on equity, return on assets and net interest margin when describing performance for

the whole bank.

The crucial facet of managing non interest income and expense is knowledge

about the profitability of different customer relationships.this information allows

management to target product and services and alter pricing strategies to ensure that

customers get what they want and that the packages of services or porducts are

prifitable.

Nowadays, public sector banks are using CRM. They have separate CRM

department and also banks have various CRM software like Seibel ,finacle and

variou others.

The various strategies adopted by banks have resulted in customer satisfaction,

effective and faster delivery channel, innovative products, and better penetration pf

banking services, proper pricing of product etc.

Three patterns have emerged of strategy implementation:

Some initiatives fail

Some get off to a promising start and then lose momentum.

A small number launch a process of self sustaining improvement.

Therefore it is not only important to plan strategy but also to ensure its wise

implementation. Strategic management has become vital part of planning to survive

in the ever changing economy to improve performance.


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8.LIMITATIONS OF PROJECT

TIME CONSTRAINT : The project report is prepared within a limited period

which is not sufficient to carry out a detailed research on the topic.

PAGE CONSTRAINT: The page constraint in preparing the report makes it

difficult to compile all the information which is important. Thus it is not possible to

explain the concepts more deeply and make the report more interesting, detailed and

practical.

SPACE CONSTRAINT : The report is prepared only with reference to the

Indian scenario and some of the strategies mentioned do not apply for the banks in

other countries.

LACK OF EXPERIENCE : As a student, having limited experience,

knowledge and exposure to practical world, it is difficult to view and analyze the

practical application of the strategies in the banking industry. Thus making the

project more of theoretical and less practical.

Partial disclosure regarding the various aspect of strategy by the manager of

Bank of Baroda has leads to no in-depth study regarding the strategy adopted by

bank of Baroda.


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The banking industry is often exposed to changing reforms and technology

revolution which necessitates providing strategies relating to present scenario only.

CONCLUSION

In the present environment, a paradigm change in the Indian banking industry is

inevitable. As said by Charles Darwin: it is not the strongest of the species that

survive, not the most intelligent, but the one most responsive to change.

It is important for the banks to adapt to the changing environment. Banks are

increasingly operating in a world where their products have been commoditized;

where pricing wars have resulted in zero sum game; and where physical location

has become irrelevant. Consequently, the customer experience of a banks service

becomes its brand. However customer orientation cannot be mandated. Banks have

to build a management system and a corporate culture that enthuses each person to

provide world class service to there customers. This is how banks build global

brands that are respected anywhere in the world. It is also important to remember

that technology is an enabler and not a panacea.

The marketing of banking and insurance services in India has a still a long way to

go especially since there is a huge untapped market. Due to the competition

introduced by the liberalization process, the existing and the new entrants will have

to be conscious of the changing market requirements. The recent years have seen a


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drastic change in the banking services as banks are noe becoming more customer

friendly. Technology has introduced revolutionary products like Home Banking,

Internet banking. Most of the banks are now becoming one-stop shop for the

various financial services. Further, the quality of service has also risen sharply even

in the public sector banks due to the competitive forces.

Indian banks have to adopt the best practises of successful financial institutions in

India and elsewhere. Otherwise Indian banks will no be competitive in global

financial markets. Further deregulation and proper monitoring of their

implementation are other ways of bringing about positive outcomes in the right

direction. As India is looking forward to implement Basel II supervisory

requirements in the near future, areas such as enhanced internal risk management

activities, increased flexibility, efficient operations, and higher revenues could be

expected for the banking sector.

Obviously, different banks follow different strategies to improve performance. This

follows from differences in individual bank operating environments as determined

by business mix, overall corporate strategic objectives, the geographic markets, and

history of cost management behavior. Each strategy can be suuceefully

implemented if pursued with long-term objectives.

To conclude, improved accounting gains are just camouflaging the banks’

performance. There are several systemic challenges. They should be reconized.

There are also opportunities for growth and value creation. India has the fastest

growing market for most products and the segments acrros asia. Ultimately,

corporate leadership and the will to manage with charasmatic leadership and strong

teams will eventually separate the hunters from prey.


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BIBLIOGRAPHY

BOOKS:

Performance of public sector banks after reforms---G. Rama Krishna.

Sevice design and delivery strategies in banks(banking service operation)

Banking strategy vol-1(ICFAI)

Banking strategy vol-2(ICFAI)

Indian banking : managing transformation---Dr.N. Nagarajan

Indian banking: Emerging issues----------Katuri Nageswara Rao

and Yash Pal Pahuja.

Bank management---Timothy W.Koch and S.Scott Mac Donald

5 kick Ass Strategies---Robert Grede.


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The Concept of Corporate Strategy, 2nd Edition (1980). Kenneth Andrews. Dow-Jones Irwin.

"What is Strategy?" Michael Porter. Harvard Business Review (Nov-Dec 1996).

Competitive Strategy (1986). Michael Porter. Harvard Business School Press.

MAGZINES

Bank quest vol 73 (jan-march 2002)

Journal of Indian institute of banking and finance (april-june 2008)

Bank Quest –emerging areas I banking (april-june 2008)

Bobmaitri (april-may 2009)

Annual report of Bank of Baroda-Baroda next (2009-2009)

WEBSITE

http://books.google.co.in/books?

q=what+comes+in+banks+overall+performance&lr=&sa=N&start=260

http://www.agr.hr/cro/istrazivanja/projekti/ahead/doc/strategic_mgmt_3.pdf

http://www.mgutheses.org/page/?q=T%201071&search=&page=&rad=#

http://www.emeraldinsight.com/Insight/searchQuickOptions.do?hdAction=button_search&ExSearchTerm=overall%20performance%20by%20banks%20in%20india----JOURNAL




http://books.google.co.in/books?q=what+comes+in+banks+overall+performance&lr=&sa=N&start=260

http://books.google.co.in/books?q=what+comes+in+banks+overall+performance&lr=&sa=N&start=260


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http://www.business-standard.com/india/storypage.php?autono=369333

www.turnaroundhelp.co.uk

http://interactive .cabinetoffice.gov./startegy/survivalguide/skills/index.htm/

http//en.wikipedia.org/wiki/performance_measurement

www.fpm.com/index.html

www.indiana_edu/uhrs/training/performance_management/define_common_exp.htm

www.bankablestrtaegies.com

www.baroda.com

www.baroda.co.in

www.icici.com

www.sbi.co.in

SEARCH ENGINE

www.google.com

www.yahoo.com

www.rediff.com

www.blackle.com

http://www.rediff.com/

http://www.yahoo.com/

http://www.google.com/

http://www.sbi.co.in/

http://www.icici.com/

http://www.baroda.co.in/

http://www.baroda.com/

http://www.bankablestrtaegies.com/

http://www.indiana_edu/uhrs/training/performance_management/define_common_exp.htm

http://www.indiana_edu/uhrs/training/performance_management/define_common_exp.htm

http://www.fpm.com/index.html

http://www.turnaroundhelp.co.uk/


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