While the priority would be seamless integration in the short term, PSBs also need to define a transformation agenda to unlock benefits beyond mergers. The focus areas need to be around improving the retail and SME share of business, enhancing customer lifetime value, increasing share of fee income, reducing cost of operations, proactive risk management and improving collection efficiency. PSBs may aim to improve their products per customer from 1.5 to three, enhance share of fee income to 20 per cent, cost to income ratio to be brought down to 50 per cent, and NPA levels to be brought down below 5 per cent over the next five years.
This should result in better Return on Assets (RoA) and Return on Equity (RoE).
Digital and analytics need to be embedded into the transformation agenda. There are several use cases for analytics around customer acquisition, enhancing customer lifetime value, optimising risks through data-based decision making (credit and operations), optimising cost of service. Many private banks have taken the lead on this and have demonstrated reasonable success. Apart from technology enablement, it calls for organisation structural changes, enhanced sales orientation and large scale up-skilling to realise the objectives.
To create and sustain a high-performance culture, banks need to explore means to recognise and reward high performers. Re-skilling and up-skilling has become an imperative. PSBs need to consider training around soft skills, areas such as design thinking, phygital channels, data and analytics, client relationship management, advanced risk management, etc. to keep pace with changing customer needs and banking trends.
While the process of having limited PSBs of scale and size has been set in motion, the important part is for them to transform and follow through on the aforementioned reforms to improve their market share. The Enhanced Access and Service Excellence (EASE) reform (Source: Responsive and Responsible PSBs: Banking Reforms Roadmap for a New India, published by Ministry of Finance, January 2018) is another action item initiated in November 2017 by whole-time directors and senior executives of PSBs that would help them increase their market share. These reforms are built around six themes - customer responsiveness, responsible banking, credit off-take, Udyamimitra for MSMEs, deepening financial inclusion and digitalisation and developing personnel for brand PSB. While a handful of large PSBs have been working towards these metrics, there is still a lot of room for improvement at other banks.
The key areas where banks need improvement against action points include mobile banking, internet banking, call centre services (increasing the number of services), providing regional language interfaces, providing self-service options such as more ATMs, cash deposit machines, pass book printers, having robust cybersecurity risk management policy in place, digital lending, etc. Implementing these would not just help PSBs but would significantly contribute towards the goal of creating a $5 trillion-economy.
Overall, bank consolidation is a positive move, but is likely to take about 2-3 years to stabilise. It is critical that banks follow through with the transformation and the EASE reforms agenda to reap the benefits of having larger balance sheets and operational footprint. We are hopeful that PSBs will emerge stronger from this exercise and repay the trust and confidence reposed by customers and shareholders alike.
(A version of this article appeared in The Business Today on March 02, 2020)