STRATEGY. Evolving a game plan for PSU banks

The Government and the Reserve Bank of India (RBI) are contemplating how the country’s macro-level banking structure should emerge to effectively support India’s growing economy. A banking structure that is conducive for increased financial penetration and inclusion, that supports rural and agricultural development, complements small and large corporates in their domestic and international aspirations, and above all, caters to the growing middle class, is paramount.

A number of questions arise in this context. Will India need few ‘super large’ banks, which by their sheer size can deliver superior service at the lowest cost to a wide spectrum of customers? Or, should India have a number of small but ‘specialised’ banks with specific customer or geographic focus, to precisely satisfy their varying needs? Or, should it be a combination of both? Most importantly, how will India’s existing banks mould themselves into the chosen structure over the next few years?

The public sector banks (PSB) are major players in the Indian banking industry but continue to ‘under perform’ private sector peers in terms of profitability and asset quality. Recently, bringing out many issues that are of concern to PSBs, the PJ Nayak committee concluded that PSB boards, comprising government and RBI nominees, is not dedicating enough time to discuss ‘strategic’ issues while most of their board conversations focus around ‘day-to-day’ operational issues.

What do we mean by ‘strategic issues’ which the board should discuss? Although the committee does not elaborate on this, discussions should concern long-term competitiveness; how a bank intends to grow? Who are its customers today, who should be its future customers? Should it focus on a ‘niche’ customer group and deliver superior service to the chosen segment or will it be a universal bank promising to provide ‘everything for everybody’?

In essence, where will it fit into India’s emerging banking structure? These questions will lay the foundation of where the bank’s focus will be, where will it invest its resources and what sort of capabilities it needs to build over the long-term in order to be competitive, satisfy the targeted customer needs and provide returns to the shareholders.

These are fundamental strategic issues that will decide the bank’s competitiveness in the long run. As representatives of the Government of India, who are the primary shareholders in the PSB, the role of the board is to ensure that the Chairman and Managing Director (CMD) and his executive team are getting these strategic decisions and execution right. Discussing routine operational matters at board level dilutes strategic focus; not that operational issues are unimportant, but can be delegated to an executive team with minimum policy directions laid out at the board level. So, are we saying that the board is responsible for the business strategy in banks? Not at all! The CMD and his executive team are solely responsible; the board’s responsibility is, however, to question, understand and guide the bank’s executive management team to ensure that the bank’s strategy is in the best ‘long-term’ interest of its shareholders. In fact, this is the very purpose of the board and most of its time should be spent in deliberating such issues.

Then, what does strategy mean at the bank’s executive level? The CMD and his executive team should ensure that every initiative within the bank focuses on building the ‘right’ capabilities that will allow the bank to serve the ‘target’ customer better than the competition, at a cost that will provide a reasonable return to its shareholders; in essence, that is strategy.

For this to be achieved, understanding target customer ‘pain points’ is key. Say, for a bank focused on retail banking, the management needs to understand how the bargaining power of its customer is enormously growing. Banks need to build superior capabilities ahead of the competition, in order to provide a seamless customer experience across all these channels.

This can be achieved by investing in technology which includes data analytics and cloud computing to precisely understand customer requirements and their preferences. This will help the bank develop ‘right’ products at the ‘right’ time to meet their exact expectations and could also provides ample scope for cross selling products to the customers. This will not only increase a bank’s revenue and market share but also ensures that the product development and marketing costs are focused and optimised. With increasing competitive rivalry, every bit counts!

On balance, the board of a PSB should act like a ‘sounding board’ for a CMD’s strategic agenda. But it is the bank’s CMD and his executive team that are responsible for its strategy formulation and execution which should lead to effective positioning, superior customer acquisition and retention, growth and eventually creating shareholder value.

Strategic thinking is hence not only important at the banks’ senior management level but also across middle and junior management; every initiative taken and every rupee invested by the bank, across its widespread branches should seamlessly align with its overall short-term and long-term strategy!

The writer is a Professor of Strategy with Great Lakes Institute of Management, Chennai

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