The Hindu Business Line : IT capability in Indian banks on par with the best globally

The Indian banking sector is at a watershed. Brisk economic growth is opening up unprecedented opportunities. Several Indian banks are pursuing global strategies, as Indian companies globalise and people of Indian origin increase their investment in India.

At the same time a number of global banks have stepped up their focus on India, keen to participate in the sector’s growth. Today, the question often asked is how competitive are Indian banks and do the practices at work in these banks compare against global best practices.

To assess this, McKinsey & Co launched five proprietary surveys with help from the Indian Banks Association to profile leading Indian banks. The surveys administered were The McKinsey Personal Financial Services Survey; Excellence in Retail Banking Survey; IT Benchmarking Survey; Organisational Performance Profile Survey; and Asset-Liability Management Survey.

IT effectiveness

The IT Benchmarking Survey profiled 11 leading banks in India. The survey based on proprietary methodology assesses the level of IT capability and how it links to business performance across four parameters – total spends on technology, alignment of IT systems with corporate objectives, utility and complexity of solutions, governance and management processes.

The survey reveals that IT effectiveness at the top Indian banks is world-class. Most banks in India have used IT to achieve superior business performance, driven mainly by the cost advantage in India, the focus on avoiding legacy systems, superior IT governance that often entails direct CEO involvement and competent outsourcing.

Today, Indian banks are some of the most technologically advanced banks with vast networks of branches empowered by strong banking systems. Their product and channel distribution capabilities are on par with those of the leading banks in the world. Sustained improvements in infrastructure and a strong focus on technology have helped India become one of the most IT-efficient countries in the world.

Highlights of survey

To get a holistic view of the performance of Indian banks, a comparison was made between two dominant categories – (i) new private and foreign banks and (ii) old private and public sector banks. The results of the survey bring out stark differences that suggest that the former use technology more effectively than the latter to promote growth while remaining operationally efficient. This can be explained by their origins.

India opened banking to the private sector less than 15 years ago. To compete with established banks, the new private and foreign banks used low-cost technology and operations to address the urban mass market and have today emerged successful on the following fronts:

Better-managed IT spends: New private and foreign banks focus their IT spends on innovations rather than daily operations. Old private and public sector banks, on the other hand, focus on application development directed more towards augmenting their existing systems that has resulted in low value-addition to their business.

More focus on value adding activities: New private and foreign banks focus more on value-added activities such as building new infrastructure like ATM networks and modern core banking systems; customer service channels including call centres, Internet banking and mobile banking; sophisticated risk-assessment and pricing techniques; data warehousing/mining tools; and marketing tools such as customer relationship management.

Better IT talent management: Although IT governance and management are strong in most Indian banks; new private and foreign banks have focused on promoting and nurturing talent. This is well reflected in their compensation structure, which is highly linked to individual performance. Further, continual effort is made to increase the distributed ownership of initiatives among all employees.

Superior complexity handling: New private and foreign banks prove superior in managing both application and infrastructure complexity. They are continuously advancing towards a centralised and consolidated application portfolio. Better integrated and flexible applications are helping them to strengthen processes and reduce the number of errors and maintenance costs. These banks also use infrastructure optimisation technologies such as desktop and server virtualisation, grid computation, and Web service implementation.

To conclude, Indian banks have a strong competitive advantage on several dimensions such as alignment between IT and business heads, management processes, and the ability to streamline administrative overheads and to channel investments. But the survey suggests that several improvement opportunities exist for both new private and foreign banks and old private and public sector banks. For instance, banks need to work towards streamlining commodity areas such as application maintenance and infrastructure. They also need to focus on investing more in value adding activities and outsourcing selectively.

Role of policymakers

Finally, policymakers have a vital role to play. They can enable players to increase customer reach in a cost efficient way and drive economies of scale.

(An excerpt from McKinsey & Company’s “Indian Banking: Towards Global Best Practices – Insights from industry benchmarking surveys” released at the Bancon in November 2007.)

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