Avnish Gulati
“In the midst of chaos, there is also opportunity” – Sun-Tzu, A Arte da Guerra (The art of war)
As the news of chaos at the Bank flies thick and fast, to the knowledgeable, it should ideally signal a tremendous opportunity not just to change but to transform. Overtly, it seems like a governance issue that needs an immediate solution. However, to the informed, the Bank may need to make structural changes to remain relevant in a rapidly changing economic and political scenario.
Blessed with a fabulous retail franchise (CASA) courtesy the unwavering trust (so far) of the people of the state and patronage of the Government, the Bank remains passive to the inroads being made by its digital, large balance sheet, & better product portfolio equipped counterparts like ICICI, HDFC, Axis & now a more agile SBI. These institutions continue to impress the young (salaried & self-employed) with their digitised, customer friendly options garnering their share of wallet of savings accounts. The consumer lending by these banks in the state is likely to kick in soon as the credit evaluation techniques become more sophisticated & digitised. Game changers like SARFESAI, GST implementation etc. are likely to provide the necessary impetus to their confidence in lending to businesses at competitive rates. All this shall be at the cost of J&K Bank which currently has around 65% market share in the state & is likely to be relegated to execution of government schemes.
Evaluating the annual reports and financials of the Bank, one can point out several deficiencies in business strategy, however, that is not the agenda of this post. Sooner than later, the Bank is likely to face challenges related to business growth, profitability and risk management if the new leadership and the powers that be do not consider these in time.
One just needs to look at the fate of regional banks like Vijaya, Dena, Laxmi Vilas and Dhanalaxmi that chose to be oblivious to the looming threat. Juxtapose this with RBL Bank that shed its PSU like work culture in 2010 & transformed into an agile, new age bank with a smaller balance sheet but 2X profitability compared to J&K Bank.
This is the opportune time for the Bank to press the refresh button and carry out a structured process of reforms.
Here is an 8 point agenda for consideration
Preferred customers segments – The Bank needs to identify its niche and aggressively expand in areas of strength. It seems to have done well in lending to consumers, small and medium enterprises and that too locally. Clearly, the Bank needs to develop the expertise in lending to large corporates (wholesale) where it has had several setbacks probably due to reliance on consortium style lending piggybacking on the risk assessment done by others. The trick is to identify several niches – explore the possibility of hitherto unexplored segments (small / micro lending as an example). There is a reason why NBFCs have been successful besides regulatory arbitrage. It is their ability to identify niche segments, develop credit models and relentlessly pursue the growth agenda. The current scale & size of the Bank permits it to think and act like one.
Products and services – The offering needs to be contemporary. For example, the retail and HNI segment besides the usual savings and lending products look for investment advisory and wealth management services. Small and Micro borrowers expect faster turn-around time and better credit risk evaluation techniques from their bankers to make use of business opportunities. Medium and large scale corporate entities need structured financing capabilities beyond the vanilla ‘term loan’ to suit their specific needs. Customer needs are to be understood and responded to expeditiously. In a fast moving consumer environment, customer stickiness is pronounced if all needs are preferably met by the same service provider.
Expansion – The Bank should follow a model of purposeful expansion outside the state instead of harping on its focus in the state. This is clearly the only strategy for survival in the long run and is beneficial in 2 ways. 1. Lesser dependence on a geography (which is sometimes extremely fragile) 2. The strategy of expansion & operations needs to be evaluated considering business opportunity, costs, and capabilities. This will push the Bank to adapt to the massive competition outside its home territory helping it learn and innovate. A carefully calibrated and persistent policy will generate positive results. The recent NBFC liquidity crisis (and Micro Finance crisis earlier) is a classic example of a space being ceded and available to the ready and hungry.
Improving Fee and Other Income – The Bank needs to steadily increase the share of fee and other income to be at least at par with Industry standards. It is an anomaly that with over 900 branches, the Bank earns ‘negligible’ fee income from distribution of mutual funds (Banks earned Rs 3480 Cr. in FY 18). The potential for increasing the income from distribution of Insurance products is at least 2X of what it makes today (approx. 40 Cr.) The Bank needs to introspect whether it is satisfied with the income generated by its trading desk / treasury operations. Similarly, the Bank must evaluate the operations of its subsidiary company and the relevance of its operations.
Risk Management – The world moved on from relationship style lending to analytics and data driven decisions about 20 years back. Sophisticated credit assessment models have been developed not just for corporate entities but for individuals. The models are being refined considering spend and transactions data, social media interactions, credit scores, etc. The level of sophistication is such that in most consumer credit decisions, there is no human intervention. These models also help organizations explore unchartered territory with a structured risk assessment framework. Similarly, analytical tools use industry & credit frameworks to predict business cycles that are extremely critical for extending loans to corporates, small and medium enterprises and managing instances of non-performing assets. The collections and recovery teams need real time information to minimize credit losses. The Bank must assess the level of maturity of its risk management framework in terms of its 1. Sufficiency of having the relevant checks and balances. 2. Contemporariness 3. Forecasting capabilities of red flagging risk events. 4. Appropriate response mechanism.
Digitization and use of Information Technology – I read an article in early 2000 in the Economic Times that described the minimal paper use policy of the then ICICI Bank CEO. Compare that with the file work that goes on in PSU Banks despite the best of IT tools including e-mails, Core Banking, CRM systems etc. available. It is baffling that why this when billions have been spent on procuring the best in class products. The difference I think is the mind-set. “Think and Adopt Digital”. In the short run – the Bank needs to identify and convert big, medium and small manual activities to be digitized, and automated – communication, proposals, operating procedures, policy manuals, and most importantly the process of service delivery. For the long haul – any new operating procedure needs to go through the CTO / CIO for it to be incubated & implemented only in the digital mode.
Operating model – The concept of “Branch” has undergone a phenomenal change. Given the digitization drive across the industry, Branches are now seen as providing more value add services making them lean, productive and profitable. Additionally, due to the stratification of business lines on the basis of product specialization, the emphasis is to reduce the non-value add activities at the branch and create hub and spoke centralised models for processing. Instead of overloading the branches with everything (including issuance, collection and recovery of loans, distribution of 3rd party products besides the business as usual), the Bank must evaluate its options for service delivery.
The changes above would require strategic thought and intent on the part of the management (including the Board of Directors) and should be achieved through a series of time bound initiatives. But absolutely none of it would be effective if the Bank does not make the most significant of all changes.
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