Indian Banking Sector - Essay Example

1. Introduction 1 Indian banking sector The Indian banking sector is significantly different from other Asian nations. The unique characteristics of the nation are reflected in the structure, size and diversity of the country’s banking and financial sector. The commercial banking system in India comprises of the public sector banks, the private banks, the foreign banks and the cooperative institutions (Deolalkar, 2000). The cooperative institutions include the urban cooperative banks, the state cooperative banks and the central cooperative banks. About 92 percent of the country’s banking sector is under state control and the rest comprises of the private and the foreign banks. The public sector commercial banks are again divided into three groups – the State Bank group, other nationalized banks and the regional rural banks. As competition in the Indian banking sector has increased due to deregulation and dilution of government ownership in PSBs, opening up of the banking sector to the private banks and foreign banks, competition has intensified. The banking sector is no more limited to accepting deposits from the public and giving out to loans to public. They now provide innovative service with innovative style. ATMs, credit cards and internet banking have changed the way banks offer services. Banks have added other services such as bankassurances, money transfers, and NRI services (Mittal & Mittal, 2009) 1.2 Marketing of services The marketing of services is different from marketing of products because services are intangible, heterogeneous, perishable and inseparable. Services cannot be patented, displayed or communicated (Zeithami & Bitner, 2000). Customer satisfaction in the services industry depends on employees’ actions (Douglas & Connor, 2003). How the service is delivered and how the service delivery process is perceived, holds importance in services marketing. The physical evidence in the service setting is extremely important, as according to Kotler, the place where service is bought is one of the most significant features (Hightower, Brady and Baker, 2002). Hence, intangible cues like the physical environment, the design, the landscape, the surroundings, the layout, the décor and the parking facilities – all create an impression on the five senses and determine how the service is perceived (Brunswick, n.d). In a bank setting, these act as interaction facilitator, thereby increasing performance. Thus, in services marketing the 4 Ps extend to seven Ps to include people, process and the physical evidence. When the service exceeds customer expectations, customer satisfaction has taken place. 2. Marketing as a challenge The Indian banking sector has several challenges of which marketing is a major challenge. This is in view of the fact that marketing has seen discontinuous growth driven by new products and services including opportunities in credit cards, consumer finance, wealth management, on the retail side. On the wholesale banking side, the banks face a marketing challenge in investment banking and fee-based income. Competition from the foreign banks has intensified. Besides, India has witnessed a demographic shift in the age and the disposable income level, which has exerted pressure on the service levels from banks. McKinsey&Company’s (2009) report finds that there is a need to create a market-driven banking sector, with special focus on social development. This report further suggests that the old private banks and the PSB have to strengthen their skills in sales and marketing. The new private banks have the potential to innovate and develop differentiated business models. The foreign banks will have to adopt an alternative approach and build a value-creating customer franchise. 2.1 Brand building as a strategy Banks have started using the branding strategy in promoting their bank as a brand (Mittal & Mittal, 2009). Banks in all categories use mass media advertising like advertising in TV commercials and newspaper dailies. Such advertisements have created awareness of the services offered by the banks. Umbrella branding works well in promoting banks. Through television commercials, and through different advertising appeal, the banks are able to influence the feelings of the consumers. While the public sector banks such as Union Bank and State Bank of India use the emotional appeal to attract people, private banks use the rational appeal. Amongst the foreign banks, Royal Bank of Scotland (RBS) also uses the emotional appeal. However it is not possible to strictly categorise the style of promotion to one particular category of bank. For instance, ICICI (private bank) and HSBC (foreign bank) have a very practical approach but RBS has a personal approach although RBS uses emotional appeal like the PSB. As far as the marketing approach is concerned, the private banks and the foreign banks focus on the comprehensiveness of their service while the PSB try to give assurance about the future of the customers. The nationalized banks are going in for branding strategy and making their customers aware of the changes happening within the bank. Bank of Baroda, for instance, has started a campaign, “Baroda Next” through which it is trying to communicate to the customers of the advanced features of their products and services (Sehgal, 2009). They are trying to impress upon the customers how their life can be made easier. As retail business is growing in India, all the banks are vying to get a sizeable portion of the market. They employ the latest technology to enhance customer service and most banks have adopted a customer-centric approach. In the service industry cutting-edge technology that is user friendly, has become important. 2.2 Personal selling Banks have started personal selling rather than relying on printed brochures. They are able to explain and convince the consumers about the service offerings. Face-to-face selling has greater impact than indirect selling methods. Consumers become emotional when banks display their social responsibility and hence banks such as Bank of Baroda and Punjab National Bank (both private sector) focus on the environmental issues. Societal marketing helps as it helps banks to win the trust of the consumers (Mittal & Mittal, 2009). 2.3 Sales promotions Sales promotions have become popular as the popularity of the usage of debit and credit cards have increased. Private Banks such as HDFC are offering incentives and gifts for using debit cards or using the internet banking facility (Mittal & Mittal, 2009). Banks are partnering with other products/brands to provide services such as with fitness clubs, food parlours and restaurants and hotels. Such sales promotions are redesigned frequently to keep attracting the new customers. Banks have also started internet marketing of services. Internet usage in India has gone up and hence while the banks benefit from e-advertising, the customers benefit because they can even use the internet to make thee purchases. Consumer behaviour has altered the marketing strategies of all banks. 2.4 Product development The economic reforms have generated new customers and new players (foreign banks and private banks) in the Indian banking sector. As competition has heightened, the customer expectations have risen both in the existing and the new customers. This means new products have to be introduced and the existing products have to be presented in innovative ways. This poses marketing challenges for the banks such as market segmentation, product positioning, innovative delivery channels, and cross-selling (Kamath et al., 2003). This requires the banks to reorient their resources and be in tune with the requirements of the marketplace. Staff skills would have to be honed up and innovative ways to attract talent would have to be found. Demographic shifts in income level and cultural shifts in terms of lifestyle aspirations provide an opportunity to the Indian banking sector to push their retail banking services. As communication technology has enhanced, consumer awareness stretches beyond the major cities. Adapting and managing the right technology hence, is the essence of marketing for the banks in India. Customer segmentation has helped the banks to customize the product portfolio. Alternate channels of delivery have developed such as ATMs, telebanking, remote access, and internet banking. Internet banking has been recognized as a new channel of distribution of the product and as a new means to explore and exploit new approaches to banking (Booz, Allen & Hamilton, 1997). Technology has become important as customers demand speed, efficiency and lower costs. The PSB realize that they need to be flexible to accommodate the changes but they also need to be able to retain the core competencies to deal with the change. There is hence a focus on customer relationship, brand equity, product differentiation and technology. A customer selects a bank based on convenience and relationship. The private and the foreign banks appear to be scoring over the PSB in retail service delivery. 2.5 Relationship management The focus of marketing in the Indian banking sector has shifted to managing relationship with customers (Sureshchandar, Rajendran & Anantharamam, 2003). Post-liberalization reforms have seen the entry of several private and foreign banks in India providing greater benefits to the customers. This has been instrumental in changing the service quality perceptions in the minds of the customers. Information technology (IT) has played a major role in enhancing customer service to the bank customers. This study compares and contrasts the service quality in the three groups of banks in India. To determine the critical factors in service quality, data was collected through questionnaires from all three sectors and the results statistically analyzed. The study determined that the technological factors like the core service and systemization of the service delivery contribute to the differences in the three sectors. The foreign banks perform the best of the three groups followed by the private and the public banks. Buyer-seller relationships in the banking sector depend to a large extent on the specific cultural basis of the parties. Dash, Bruning and Guin (2006) conducted a cross-cultural study to examine the moderating effect of power distance on the relationship quality in the bank-corporate client relationship. This was a comparative study of the Indian and the Canadian context based on one of the four dimensions of culture as specified by Hofstede. Consumers in the Indian society operate in a high power distance environment whereas the Canadian consumer is in a comparatively low power distance environment. Data was collected from 1000 Indian and 1000 Canadian companies through questionnaires and measured on a seven-point Likert-like scale. The study concludes that the degree of power distance affects the nature of business relationships. This could have managerial implications for the foreign banks entering India. In India, the corporate sector represents a small faction of its customer base and hence the bank has the power over the corporate clients. Thus, the customer view point may have to be modified if the bank’s views are different. This study, however, did not test the subcultures prevalent in the Indian society. Consumer complaints can be found in abundance regarding the failure in delivery of the banking services. George and Hegde (2004) conducted a study to determine the relationship between employees’ attitude, their motivation and satisfaction, and between customer satisfaction levels. Complaint redressal is important and is viewed as a defensive marketing strategy to retain the existing customers. Customers switch brands because their complaints were not handled to their satisfaction. How the complaint is handled can reduce or enhance the level of trust and commitment. A satisfied customer is the best agent for word-of-mouth (WOD) publicity. To determine the relationship, data was collected from the prime state bank, namely State Bank of India in the state of Goa. The study found that there was no clear policy on how to handle problem customers. The PSB employees are demotivated due to the absence of goals given to them. Unstructured complaints and those without expectations were often ignored. In contrast, a private sector bank – ICICI – has gained a strong foothold in the Indian market. It has a wide variety of products and services in personal banking, loans, insurance, foreign exchange trading and mutual funds (IBN, 2007). It also serves the non-resident Indians like money transfer, NRE and NRO accounts. Because of the changing demographics, the younger generation prefers the private sector as the public sector banks do not understand the concept of “customer service”. The PSBs treat the customers as if they are doing a great favour by safe-keeping the money of the customers. ICICI is very aggressive in its marketing strategies and it follows up with potential customers. ICICI has been found to be very prompt in responses, even more than its closest competitor HDFC. HDFC does not consider the foreign banks as its competitors and they feel that the main competition is between the PSB and the private banks as the PSB have been trying to gear up their marketing and promotional efforts. HDFC is opening numerous branches in smaller town and rural areas because they get the bulk of deposits and credit card business from these areas (Cherian, 2009). There is no lack of opportunity in the Indian banking system. In the Indian banking sector, the demand exceeds supply and lower pricing by any bank does not mean others do not get business. It is how the offers are presented. Hence, banks do not go in for lowest pricing or interest rates. HDFC does not go in for unrealistic pricing. This suggests, that the private banks decide on their distribution channels and the products depending upon the market situations. The foreign banks had restrictions on branch expansion and hence they initially focused on the top 25 cities of the country (Das, 2004). They created differentiation by focusing on premier customers. They also set new standards in productivity, customer services, and operating efficiencies, by using the latest technology. Since the private banks had no restriction, they expanded by opening branches but duplicated the services of the foreign banks. The new private sector banks that started aggressive marketing posed a challenge to the PSB. The new private banks had the advantage as they started with the state-of-the-art technology. Hence to beat competition, the PSBs also responded by adding several services such as credit and debit cards, sweep-in accounts, demat account and anywhere banking. They have also included other services such as round-the-clock phone banking, inter-branch banking and bill collection and payment services. Most PSB went in computerization and ‘anywhere banking’ facility for the consumers. The PSB, private and foreign banks have all invested heavily in ATMs which has facilitated cash withdrawal for the customers apart from transfer of funds. Now, all the three categories of banks offer all the facilities which are easily duplicated. What cannot be replicated is the unique physical location of the bank and its brand name. Acquiring the trust and the brand equity is difficult for banks to obtain through investment. The State Bank of India, the biggest PSB scores the highest on these two factors which ash been determined based on several customer surveys. Several other PSBs have not invested in brand building and this could impact them because of the strong presence and brand identity of the private banks. No private or foreign bank can match the wide network of branches the SBI has in the urban and the rural areas in India. The ICICI, for instance, has build a brand image and metamorphosed from the traditional business of lending money to industrial projects (Banknet, 2001). It now offers several services and they have achieved the status of one-stop-shop, a universal bank and a financial supermarket. They have expended in a different way. They have opened several subsidiaries to help in its growth. With the help of these subsidiaries, ICICI is able to focus on a particular segment for specific areas of operation. ICICI has focused on a massive brand building exercise. Cross-selling has hence been adopted as the main marketing strategy by the Indian banks. This study conducted by Vyas and Math (2006) found differences in the cross-selling practices of private banks and the PSBs. The private banks use CRM tools, train their employees and customize their products where the PSBs lag behind. The channel and the product depend to a large extent on the consumer characteristics in India and hence banks have to be very careful in selecting these when deciding to cross-sell. The banks need to understand the customers’ preferences and design a contact management system. 3. Rural marketing Rural banking is a regularized activity by the Government of India where the lending as well as the interest rates is regularized (Trivedi, 2007) Because of the high level of illiteracy in the rural area, product development, communication and promotional activities have to differ from the urban marketing techniques. Loans have to be suitable to farmers and small traders. Rural areas require personalized banking as people are hesitant to rely on technology. In the smaller towns and rural India, amongst the PSBs it is the SBI and among the private banks, ICICI are having the strongest presence with innovative business models and technologies. The foreign banks such as the Citibank and the HSBC serve as investment bankers to corporations, and focusing on a mushrooming ‘consumer class’ (IHT, 2005). Tapping into the rural segment is where the local banks have an advantage over the foreign banks. ICICI has now separated its rural banking operations as a standalone business. They have made a brand image in the rural area through services such as microfinance, agricultural business and rural lending. To meet the requirements of the rural segment, it has acted by shrinking and redesigning its products to suit the rural segment. They have developed a concept whereby the banking products are conceived as nay other product. It has revolutionized its distribution channels in the rural areas by supporting the entrepreneurs to set up kiosks. ICICI provides them training, connects them to internet and uses them to reach its banking products to the masses. Such creative approaches have helped them save in their overhead costs. In addition, ICICI also provides microfinance in the rural areas. They have started the ‘No white Space’ rural business architecture which is based on the microfinance institutions, NGOs and individual franchisees (Chatterjee, 2007). The NGOs play a pivotal role in such ventures. ICICI, by focusing on micro credit in rural areas, has become a social entrepreneur, thereby blending the social and business responsibility. All these have added to its brand image and enhanced the brand equity. 4. Conclusion The marketing strategy of the each of the tree categories differs. The foreign banks have their limitations as they cannot open beyond a certain number of branches. Hence they focus on operational efficiencies and focus on the niche consumer as consumerism in India has been growing. The private banks have swept the nation with their innovative products and marketing strategies. They are the toughest challenge to the PSB. ICICI for instance, has been able to tap rural India, which hitherto has been the domain of the SBI. In the urban area, HDFC poses a challenge to SBI in terms of wide area of network. The private banks have diversified into several product offerings but these too have been, over the years replicated by the PSBs. Some PSBs, however, lag behind and have been affected the strong marketing strategies of the private banks. Most banks have entered into aggressive brand building and sales promotional offers such as free gifts and vouchers by clubbing with other products. Advertising and commercials too are common to all banks. Hence, the differentiation lies in the customer segment they focus on. While the PSBs cater to the mass market, the private banks focus on their specialization in services. The foreign banks focus on the growing set of niche consumers with changing demographics. What cannot be replicated is the huge number of physical locations and the brand equity. 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