The stiff competition in the financial sector has brought the best out of Indian banks in this decade with new private and foreign banks (called attackers) moving much ahead of their public sector and old private counterparts (referred as incumbents), according to a McKinsey & Company report unveiled at BANCON 2007 today.
The gap between the two groups has only widended between 2000 and 2007. The survey outcome reinforces the view that dramatic contrasts in the performance of banks are undesirable and will eventually either threaten systemic stability or constrain economic growth through a conservative policy.
For instance, policies on mergers and acquisitions will enable stronger and higher-capability banks to continue innovating and will also take on the task of transforming less-capable banks. Further, there is a need to introduce policies and regulations that will enable and empower the incumbent banks, in the absence of which their success will be limited.
While the overall profitability of newer banks and incumbent banks is on par at 15 per cent and 14 per cent respectively, the latter earn 33 per cent return on equity on their retail businesses compared to an average of 16 per cent by the former, a result of their legacy deposit franchises.
Legacy banks earn 9 per cent ROE on their remaining businesses as compared to 15 per cent ROE by newer banks.
Joydeep Sengupta, Director, McKinsey, said: "Newer banks have superior capabilities and practices at work. It is encouraging to see that some of India's best banks are among the most technology efficient banks in the world."
That doesn't discount the challenges they have to contend with. As they gain scale, these banks need to significantly strengthen their level of customer service, to ensure that they reap the benefits of their investments in building a large retail franchise.
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