The Hindu Business Line : ‘India growth story is intact’

Mr Saurabh Tripathi, Partner and Director of Boston Consulting Group (BCG), Mumbai, reminds us that India, for long, was a 5-6 per cent growth story, and that a dip to 7.5 per cent (from 9 per cent) is not such a bad state to be in. He believes the India growth story is intact and says that there are many areas where Indian companies will show the world a different way of doing business.

While consulting has not matured as an industry in the country with huge under-penetration compared to more mature economies, he says the consulting share of emerging markets (including India) will go up in the future.

BCG, which has been in India for over 15 years, recently released an interesting report on value creation in the Indian banking industry. A key finding, says Mr Tripathi, is that Indian banking tops the chart in value creation in the world and also among the BRIC countries.

This, despite the steepest correction seen in the first quarter of the year, he adds. An alarming finding, however, is that the gap between the P/E multiples of the private sector and the public sector has been widening.

BCG terms it ‘the business model discount’. This has interesting implications for the Government, explains Mr Tripathi. “For instance, even keeping aside the privatisation debate, a change in business model, organisational design, and a few other parameters could lead to increase in valuation, and make it much easier to handle the capital constraints of public sector banks without losing the public sector character.”

In this interview with Business Line, Mr Tripathi shares his thoughts on the Indian market, the changing offshore trends and his company’s report finding, including the seven transformational changes in the business model of the public sector banks.

Excerpts from the interview:

How different are your challenges in India as compared to other markets?

Our clients’ challenges are BCG’s challenges. Unlike the more mature economies, clients in India face unique challenges and opportunities.

Mature economies witness slow growth and BCG’s clients often face issues with incremental ramifications.

In India, clients are witnessing an opportunity to leapfrog and become world leaders in a short span of time.

Over next 25 years, India will be the third largest economy in the world.

This is throwing open unprecedented opportunities. Clients in India aspire to become global leaders, transform their business models in tune with new environment, deal with hyper growth without imploding, and create innovative products and business models to serve vast numbers of aspiring but poor consumers.

The established management theories that apply to mature markets do not apply to hyper growth markets.

India has seen an offshore wave …… What’s the trend now?

Our argument is that “globalisation” is giving way to “globality” which is about competing with everyone, from everywhere, for everything. While offshoring started as a cost reduction opportunity, by offshoring back office to low-cost destinations such as India, MNCs are now looking at their entire value chain to decide the activity and geography based on cost advantages, talent availability, market proximity and quality considerations. We now have examples of MNCs creating India-based positions like Chief Globalisation Officer.

We assist our clients in developing comprehensive strategy to embrace globality. We work with vendors to develop strategy to reach out to potential clients.

Issues relating to the IT/ITeS space…

The industry continues to be supply constrained. The real issue is how to harness the millions of undereducated young people in tier II and III towns to man the offshoring industry. This will check spiralling costs and abnormal attrition that is rampant. The global clients are recognising that the third-party players are matured enough and they do not have to set up a captive centre any more. There is recognition now for a partnership model with BPO companies rather than a cost-focussed vendor relationship.

The future Indian companies…

World-beating companies will be (are being created) out of India. New management concepts and theories have to be created to manage business successfully in this environment. There are many areas where companies in India will show the world a different way of doing business — innovation in talent management, embracing globalisation, low-cost manufacturing, offshore business models and managing global value chain.

You have talked about significant changes in the business model for Indian public sector banks….

Yes, our recently-released report on value creation in Indian banking highlighted the imperatives for the public sector banks and the Government of India. The primary action for the Ministry is to strengthen corporate governance of the banks.

The boards of the banks need to be made much more powerful with further strengthening of systems, skills and composition. The boards should progressively take decisions that are currently taken by the Ministry — how much of incentive compensation and who should get it.

The Government should spur consolidation to create a few large banks. Given the way it is, the Government has to play a proactive role and cannot just ask the bank managements to initiate the discussions. And finally the business models of the banks have to be changed to suit the changed environment.

Seven changes in business model can be undertaken by the bank management.

First, the vocabulary of performance has to be augmented. No one looks at their multiple currently. Some look at the absolute value of their share price — which is incorrect. The concept of shareholder return has to be brought in.

Second, organisation structures have to change to more customer-centric models. New principles of organisation design can be adopted to create “performance accountability” at all levels in the hierarchy.

Third, manpower is the biggest challenge for the public sector banks. They would need to hire people in large numbers over next five years to maintain growth and stay competitive. The entire HR framework needs to be revamped. The skill sets of existing staff needs to be strengthened.

Fourth issue is technology. Over Rs 10,000 crore have been spent by the public sector banks on technology over the last decade, but ROI has not been tracked. Hence, one has not been able to trace a significant difference in the financial performance of banks that have spent a lot on technology and those that have not.

Given that the IT spend (at about 2.5 per cent of revenue) is low and will only go up, a ROI framework will ensure benefits accrue in full measure.

Fifth, the one financial metric where public sector banks lag is fee income. Many banks reduce their fees to retain customers, an approach that has to change. Newer areas of fee generation like wealth management have to be adopted, especially in light of the fact that the spreads will only go down as the market matures.

Sixth issue is distribution. India still has very few bank branches and ATMs (per lakh population) compared to other economies. Banks have to optimise their existing branch and ATM networks to get more business out of them and have to look for aggressive expansion through cost effective ways.

Finally, through all this, the existing employees have to be engaged and taken along.

What are the challenges in the adoption of this newer model?

The biggest challenge is to engage the existing staff in transformation. Banking is a service business and real product is delivered by the staff in branches at the teller. Unless the change reaches that last level, no tangible change will take place. Getting employees to change their behaviour is not easy when the average age is well over 45. Banks with ambitious top management team could strive to achieve these. How fast things will move is to be seen.

What is your view on the ‘India growth story’?

Barring the external factors like oil prices and commodity price inflation, nothing major has changed in the internal economy. Large consuming class is there. So are the new age entrepreneurs. Interest in India as a destination for investment is intact amongst serious long-term investors. Hopefully the reforms will come back into the forefront.

We have gotten used to 9 per cent growth, that a projection of 7.5 per cent looks disappointing (For long, India used to be a 5-6 per cent growth story). We might see a “dip” this year but long-term outlook continues to be positive.

D. MURALI

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