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CASE STUDY Banking on Core Competence ''I wonder if I am the right person to change the mindset of an organisation that is not customer-conscious. I was groomed in a banking system that was created with a socialistic objective: rural development. I found it difficult to adapt to the new banking environment even in my previous stint as the Chairman of Bharat Bank. I did the first thing that came to mind: investing in infotech. However, that alone cannot catapult you into the future unless you understand your competencies. I am positive that my task at Hindustan Bank is going to be tough. As a competitor, I used to keep close tabs on the bank, and was appalled by its reluctance to change. Now, I have been asked to turn around that very bank. So, do I focus on its existing businesses or venture into new ones? Should the bank cater to a few customer needs or meet all the requirements of a specific customer segment? How do I identify the competencies of such an organisation?'' Fifty-four-year-old Hiren Bose, who had just been appointed the Chairman of Hindustan Bank, had every reason to worry about his new job. ICICI Banking Corporation's H.N. Sinor and the UTI Bank's Supriya Gupta discuss the magnitude of Bose's problems. A BT Case Study. The Diary Of Hiren Bose, Chairman & Managing Director, Hindustan Bank. April 1, 1996 It has finally happened. I received a telephonic confirmation yesterday from the Union Ministry of Finance about my appointment, with immediate effect, as the Chairman and Managing Director of Hindustan Bank. I will have to take charge in a day or two. I must say that I have had a rewarding 5-year term as the head of Bharat Bank between 1991 and 1996-a period of dramatic change in the banking industry in this country. I know that Hindustan Bank has been in business since 1915, introduced home-savings accounts and lockers in 1921, and was also the first nationalised bank to offer credit cards here. While it should have seized leadership in a number of areas, it failed to do so. Naturally, it has the image of a stodgy, old, slow-moving institution today. My brief is clear: make the elephant dance. It is, by no means, an easy task. After all, there are so many fleet-footed players today. Just how do I transform Hindustan Bank into a modern commercial bank? April 3, 1996 Today is a Sunday. I thought of chalking out my immediate priorities at Hindustan Bank, but couldn't. The thought of heading a bank that had been so low in my estimation during my earlier tenure made me feel sick. I wonder what my former colleagues are thinking about me. But I shall have to rise to the challenge. April 8, 1996 I had my first meeting with the Management Committee this morning. We reviewed the financials. Hindustan Bank has been incurring a loss in the last 4 years. Of course, the other nationalised banks too have had to bleed their balance-sheets to clean them up thanks to the new norms on bad debts. But that is hardly a comforting thought. The ratio of our Non-Performing Assets (NPAs) to Total Advances is 16 per cent, but our fundamentals are sound. We have a huge network of branches, and brand equity in the small-scale sector. 200 units that have grown into bigger corporations continue to bank with us. I can see two pockets of excellence: fund management, and export finance. The key to survival lies in identifying our strengths and building on them. That will be my biggest challenge at Hindustan Bank. April 10, 1996 How things change! I had joined Bharat Bank as an officer 5 years before 14 banks-including my own-were nationalised by the Government of India in 1969. For the next two decades, we rode the boom. We were at the forefront of taking banking to the masses. In the process, we created a vast infrastructure. That has become both an asset and a liability now. Suddenly, we have been overtaken by technology, which has rendered the concepts of time and space redundant. The new private sector banks enjoy one advantage: an unmatched degree of automation, which enables them to cut their transaction costs as well as leverage their expertise in specialised areas like retail banking, corporate finance, and investment banking. They pose a threat to the profitability of the nationalised banks. We have also had to contend with an increasing number of Non-Banking Finance Companies (NBFCs) in our resource-mobilisation efforts. There are other forces at work too. Increasingly, disintermediation has resulted in corporates tapping both the domestic and the global markets directly. And while banks are getting involved in long-term project financing, where they have to compete with the Development Financial Institutions, the latter are trying to make inroads into short-term financing-the mainstay of commercial banks like us. Hindustan Bank has more than 3,000 branches spread all over. When they were opened, the bank did not pay adequate attention to factors like their profitability, growth-potential, and delivery-mechanisms. Most of the deposits were mopped up from the rural and semi-urban sections while loans were provided to the urban areas. Practically all the branches were engaged in the entire gamut of banking activities. Of course, some specialised branches were set up, but there was hardly any attempt at exploiting their capabilities. Hindustan Bank's priorities lay elsewhere; it was more concerned with expanding its rural reach. April 13, 1996 Nationalised banks are like pre-historic monsters; they can flounder any time. We have to ask ourselves whether we want to be everything to everybody, or choose a niche that will guard us against competition. It is a choice that Hindustan Bank will have to make, sooner or later. With the array of services that we already provide-project finance, retail finance, housing finance, export finance, and asset management-it is easier to upgrade Hindustan Bank into a one-stop shop, where we meet all the customer's requirements under one roof. The limitations: our costs could spin out of control, and new products may have to be cross-subsidised. Universal banking is not the best option when cost and profitability are the biggest stumbling-blocks. It would be prudent, I suspect, to exploit niches instead. April 15, 1996 I met Pradeep Padwal, the CEO of the consultancy firm, Mathews-Murrell India, at lunch today. The London-based parent, Mathews-Murrell Inc., has a special cell that is involved in restructuring banks all over the world. We were discussing how we could identify the core competency of a bank. A core competency, Padwal said, is an invisible asset that represents the collective learning of a bank over the years-a bundle of accumulated knowledge and skills that is not widely available in the banking industry. Viewed in that sense, we must have a number of competencies: a large asset-base, a huge network of branches, privileged access to Public Sector Unit (PSU) accounts. But Padwal was quick to point out that these were not core competencies, and were not sustainable in the long run since the other nationalised banks had them too. He went on to list three parameters that would help identify a core competence at Hindustan Bank:
The best way to go about the exercise, said Padwal, is to narrow down on 20-30 capabilities, of which 5-6 could be focused on. April 17, 1996 I brought this issue up at the Management Committee meeting this morning. It was agreed unanimously that our top managers should spend a significant portion of their time in developing a strategic architecture for Hindustan Bank. This architecture would first establish the objectives of competence-building, identify the focus areas and technologies that each would require, and provide a route-map for the future. Once we do that, we would have a rationale for product- and market-diversification. And it would give us the leeway to manage uncertainties in the implementation phase. It was agreed that the bank's senior managers should ponder the following questions: who will be our future customers? What kind of distribution and delivery channels will we have in place? What will the competition be like tomorrow? Will it be price, service, technology, or talent that will be the basis of competition? What will be the characteristics of our competitive strategy? Where will our margins come from? Evidently, competence can only be developed through foresight. We should be able to anticipate the shape of things in the banking industry in the next 10 years, ensure that it evolves in a way that is advantageous to Hindustan Bank, and develop skills to help us attain leadership in certain segments of the business. April 20, 1996 In hindsight, I can now say with satisfaction that I was able to build infotech into Bharat Bank during the last 3 years of my tenure. By automating both front-office and back-office transactions in more than half our 2,500 branches, we became the first nationalised bank to offer hi-tech delivery-mechanisms like Automated Teller Machines (ATMs). Infotech applications were clearly aimed at providing customer value. I can think of building one particular capability at Hindustan Bank: treasury management. The bank has a formidable pool of talent in dealing-room operations, enabling it to participate simultaneously in the debt, foreign exchange, and equity markets. April 24, 1996 I get the feeling that treasury operations-be they in the money, foreign exchange, debt, or capital markets-are seen as isolated activities at Hindustan Bank. We should aim at integrating all our treasury dealings. That will help us move across different segments of the financial market to take advantage of arbitrage opportunities. Which is precisely what the private and foreign banks have been doing. There is an excessive dependence on interest income at Hindustan Bank. This has to change. One of my priorities is to sharpen the bank's focus on fee-based income. The ratio of fee income to total income for 1996-97 was 18.44 per cent in the case of Samrat Bank-which is less than 3 years old-while it was about 9 per cent for Hindustan Bank. With spreads coming under increasing pressure, we will have to find other ways of increasing our Other Income. April 29, 1996 I had a long session with my senior managers at the bank's holiday home in NOIDA, near Delhi. This is the beginning of a series of brainstorming sessions. We have already identified 7 broad areas of action that Hindustan Bank should simultaneously work on. It may help us evolve some core competencies, which should direct the bank's advance into the future. The focus areas:
May 1, 1996 I have been talking to our operations managers. I am convinced that Hindustan Bank has effective systems and controls in place. But we need to strengthen our business systems. I am inclined to appoint Mathews-Murrell India as our consultants. They have done some pioneering work at Suvidha Bank where, by reengineering its processes, they brought about a radical redesign of systems to achieve improvements in cost management, customer service, and time-cycles. See where Suvidha Bank is today: Business Today rated it the No. 1 bank in customer service last year. While Bharat Bank is ranked No. 37, Hindustan Bank doesn't even figure in the Top 50. I wonder whether we can climb into the Top 10 even in the next 5 years. I will strive to reach the Top 10 in the next 2 years. May 2, 1996 Sooner or later, Hindustan Bank will divest a part of its equity to the public. We did so at Bharat Bank last year. Then, we will be accountable to our new shareholders. So, it is necessary to get our focus right on the following issues:
May 5, 1996 I had a long chat with Kamal Sutar, the President of the Hindustan Bank Employees Union. He expressed my worst fears. He promised me that the 51,065-strong union would oppose any downsizing plan. I told him that our future lay in niche areas, and that we should strive to meet all the requirements of a specific group of customers rather than dabbling in every banking activity. I even argued that employee costs had shot up to Rs 623 crore in 1995-96. But he left unconvinced. May 6, 1996 I remember a survey we had commissioned at Bharat Bank, which showed how retail banking was emerging as a new growth area. Historically, banks borrow from the retail segment and lend to the wholesale segment. In the new environment, the segregation of sources and end-uses of funds are, gradually, disappearing. With spreads in corporate banking coming under pressure, banks are now focusing on retail banking. The retail customer has also begun borrowing from the banks. This has led to the introduction of a new spectrum of products and services, like auto loans, housing finance, and credit cards. Not only does retail banking promise higher spreads, the risks attached to these assets are also lower. I have set up a committee to identify the opportunities in personal banking. It will take us at least 6 months to firm up our plans. May 10, 1996 I received a call this morning from Bipin Moria, a merchant banker whom I have known for many years. He congratulated me on my new assignment, but I was disturbed by what he said at the end of our conversation. He hinted that if Hindustan Bank were to think in terms of a merger with any other bank-he even suggested Bharat Bank as a possible partner-he would be glad to handle the formalities. I felt I had been hit by a thunderbolt. I suddenly realised that the process of consolidation, which has been sweeping the global financial services sector in the 1990s is at our doorstep. With spreads coming under increasing pressure, and competition hotting up, the banks will be compelled to build economies of scale through mergers. Only the fittest will survive. Liberalisation has led to a shakeout in a number of industries. And banking is no exception. It has also forced us to tighten our operations. It will, of course, pay off in the long run. It would be strategic to strike an alliance with a global bank. That will reduce the time and the cost involved in building competencies from scratch. And, apart from giving us access to better technology and product-expertise, a strategic alliance will give us credibility and capability. May 12, 1996 I now realise why our competitors, especially the private banks, have opted for strategic alliances with global majors. Samrat Bank has, for instance, tied up with the Australian bank, Universal East, to bolster its dealing-room operations. The foreign bank will conduct training programmes in risk-management and even provide its proprietary software. Samrat Bank succeeded in getting a partner because it has a smaller workforce, and is focused on the high net worth customer. Hindustan Bank, which has a large workforce and is unfocused, could face problems in finding the right partner. Besides, any foreign bank will insist on acquiring a stake in Hindustan Bank. Unless we are on a strong financial footing, it will be difficult to drive a hard bargain. Has CEO Hiren Bose been able to put his finger on the problems that are plaguing Hindustan Bank? Given his past experience in a nationalised bank, can he actually take his new organisation into the future? How can Bose get his business focus, and an emphasis on product profitability, right? Should Hindustan Bank become a niche player, or an universal bank offering an array of financial services? Can a large organisation actually think small? What should Bose keep in mind while seeking a strategic alliance with an international partner? How can Bose identify, and grow, the core competencies of Hindustan Bank? |
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