Time to focus on competitive differentiators

Due to the volatility in market, the entire growth of bank deposits is in term deposits that attract more interest while the demand deposits comprising Current Account and Savings Accounts (CASA) deposits have recorded a negative growth by Rs 171 billion rupees

Dr K Srinivasa Rao

Even in the midst of the ongoing slowdown, banks are seen building up their distinct competitive differentiators to cope with the challenging environment. Delivering value through their embedded core competencies is gaining better momentum. While some are good at wooing low-cost resources, others are good at pushing SME and export credit, creating means for better profitability.

Banks having foreign offices and strong correspondent relationships abroad are mopping up NRI deposits on the strength of the recent special dispensation of the Reserve Bank of India (RBI) granted in the wake of rupee depreciation. Thus a well-planned cost-efficient business mix aligned to its innate capability in terms of technology-led alternate delivery channels, improved products and processes are shaping up as strong business differentiators. Moreover, the banks, over a period of time, have come to build their own line of competencies to serve customized business segments with professional acumen.

The operating market environment of banks continues to witness volatility in equity and bond markets, rise in bullion prices and dipping Net Asset Value (NAV) of Mutual Funds. These have doused the appetite and sentiments of the investors. The Indian rupee having depreciated by around 20 per cent during the current fiscal has exacerbated the challenge, more so for banks. The Bankex, the share price index of banks, has come down by 27.27 per cent since April 2, 2013, remaining far below the BSE sensex curve which is almost flat during the period.

The fact that the performance of banks continues to be in tandem with the market is not factored in the gyration of their stock prices. The deposits have grown by 5.2 per cent and advances by 4.7 per cent till 9th August, 2013, against the RBI target of deposit growth estimated at 15 per cent and credit growth at 14 per cent in FY14. During the period, Credit Deposit (CD) ratio is modestly up by 12 basis points. The year-on-year growth of bank deposits works out to 13 per cent while advances are ahead of the target at 16.6 per cent.

Coming to the macroeconomic backdrop, the Q1 GDP of FY14 is at 4.4 per cent. The Indian economy continues to face the stiff challenges of Widening Current Account Deficit (CAD), fiscal deficit, rising food inflation at 11.91 per cent in July 2013, fears of exacerbating crude oil prices hovering at US $ 115 due to US-Syria conflict. The Indian banking industry normally looks at period beyond Q1 to step up its tempo of growth but the volatile external sector and morbid state of business environment has cramped its growth. The stifling liquidity, continued pressure on asset quality and lack of investment climate is impacting growth.

But due to the volatility in market, the entire growth of bank deposits is in term deposits that attract more interest while the demand deposits comprising Current Account and Savings Accounts (CASA) deposits have recorded a negative growth by Rs.171 billion rupees. Obviously, the preference of bank customers is moving towards term deposits. Such dip in CASA at the industry level is set to impact the profitability of banks. The pace of CASA growth should pick up after the last leg of Q2 onwards.

In the milieu of such efforts, banks can further harness the full potentiality of their financial inclusion plans by connecting more people to the formal banking system to augment CASA growth. The cost-efficient business mix would be critical for the banks in FY14 going through tough times in terms of quality of assets.

Rise in the incidence of stalled projects, lack of supply of coal to energy sector, poor off-take of new infrastructure activities and lack of incentive to avail the loans has reduced the demand for commercial credit from the banking sector.

Revival of export performance, emerging potentiality of farm sector growth due to good spatial monsoon, demand for low-cost housing and spurt in E-commerce are some of the positive factors to build upon the strengths. Taking benefit of newly opened branches and alternate delivery channels of the recent years, banks are touching new micro markets and spreading wings in the hinterland that was untouched in the past.

Such nuances in approach should be able to get new business which is not much impacted with the ongoing slowdown. Hence, rightly, banks are timing well on building competitive differentiators to leverage the incipient potentiality of the economy that has a distinct rural bias. This can help banks to woo the new set of customers including the Gen – Y.

(The writer is the General Manager, Strategic planning, at Bank of Baroda, Mumbai. The views are his own.)