Y2KXII- A Challenge to Indian Banking Industry

Does it sound like famous Y2K problem? Well it does and has the repercussions larger
than Y2K problem a decade ago. Y2K was a damp squib but this one promises to give the
public sector banks a marathon run for their money literally. This one is man made
problem relating to manpower at top levels in Indian Public Sector banks. At recent
Conference of Indian Banks, Chairman & Managing Director of Union Bank of India has
made a startling revelation that 58% of the top level executives of the public sector
banks would be retiring in Y2KXII or Year 2012. Obviously this has been known for
long enough and a committee appointed by government of India headed by Mr.
A.K.Khandelwal, former Chairman of Bank of India, is looking into human resources
problems of the banks.

Business Process Reengineering:

Human resource development, particularly at higher levels, is a daunting task and takes
sustained efforts of years. The challenge ahead for the industry therefore is to spot the
talent from within and encourage evolution of leadership from middle levels. It is not
about replacing on one-to-one and level-by-level basis. It is about recasting the model of
delivery of services to external clients as well as within the organization. It is about
business process re-engineering in real sense where the end results expected are clearly
well defined in terms of reduced available manpower for more efficient performance of
the overall system. It is also about providing adequate avenues for internal growth and
standing up to global competition.

Lack of Customer Orientation in Retail Banking:

The Indian banking system has gone through the crisis due to collapse of global financial
systems last year almost unscathed. Claims for this relative success are being made from
moral high grounds of being conservative with better control. However, in my view, we
are trying to brush under the carpet our lack of entrepreneurship, leadership as well as
abilities to play truly global role of any significance in banking circles. State Bank of
India is the largest bank with global ranking of 64. But just visit any overseas branch of
not only SBI but any other Indian public sector bank and we would notice a distinct
difference in front line operations overseas and within India. Even if we have changed
work styles in overseas operations to fall in line with local competition, we have isolated
domestic operations from full benefits of technology.

I recall an incidence of overseas remittance from US to a public sector bank in Pune.

Remittance for settlement of repayment of education loan took more than a month to
trace and connect at branch level. Since the loan was fully repaid, I asked for a letter of
no dues closing the loan. I was told it is not required! After insistence I managed to get a
hand written letter from the branch manager. Even under core banking, the front line
operations are much below the expectations of customers and there is a yawning gap in
performance of public sector and private sector banks in retail banking. Public sector
banks need to be sensitized to the needs of the customers.

Paradigm Change in Business Model:

The effect of retirement 58% executives of top levels would have definite impact on
operational decision making processes as well as risk taking and strategic decisions in the
banks. It is obviously an opportunity to change the model of business across the board in
the public sector banks. Since the scale of operations involved is massive and definitely
difficult to comprehend, the best way to go about managing the change is to identify the
elements of transactions and processes to standardize on most cost effective solutions
with least involvement of top managerial interventions. This calls for routine
operational decision making to be built into systems with delegation of powers,
safeguards, early warning systems and accountability. This should help lesser
skilled managers to take decisions fitting into overall policies set at top levels
without raising the levels of decision makers. The strategic decision making has to
be left to the senior leaders at top levels.

Cut the Flab:

There should be total focus on evolving new model for entire public sector banking
system taking advantage of this situation. In normal circumstances, it is difficult to cut
down the flab in organizations and make them nimble. Here is the opportunity to prepare
for overhaul to face the challenges of stiff competition and technological transformation.
Specifically following issues need to be focused upon:

1. Major Structural Innovations: The public sector banks have too many layers in
management structure. Since more than half the number of top level executives are set to
retire in two years, it is feasible to delayer the organization within a bank & across the
banks for uniformity of solutions to common problems.

2. De-layering: The retiring top executives should put their experience together to work
out how the de-layering can be done. Some levels should be merged to make a cadre,
with only monetary benefits being the differentiating factor based on performance or
seniority. The retiring executives should stand by to guide till they retire and let younger
generation take charge with immediate effect.

3. Delegation with Accountability: Evolve norms for pushing accountability to lower

levels instead of routine delegation to higher levels. This will empower lower level
executives to take higher responsibilities. Obviously, there will be a pressure to improve
salaries which has to be done selectively and only commensurate with higher
responsibilities.

4. Public Private Migration Platform: There has to be a system of public private

migration platform within the banking system. Public sector executives can easily quit
and join private sector banks but reverse is virtually not possible due to difference in
salary structures. Let us not forget that this sudden vacuum in public sector banks opens
up lots of opportunities for private sector employees to move up the ladder into publics
sector banks. This should be made feasible at least at two stages, middle management
level and senior management level, for select areas on short term contract basis for 3-5
years. This will help public sector banks to get talents from private sector for injecting
fresh ideas without hassles of matching pay scales etc. Since such recruitments can be on
contract basis, without normal benefits like pension, gratuity etc., it should be possible to
meet expectations of willing candidates. This will also not upset the salary structure for
regular permanent employees. Such contract staff can go back to private sector banks
after their contract may be even on lien basis, if a frame work is worked out for such
movements.

5. Prioritize: The areas of operations for implementation of drastic changes have to be

identified in terms of criticality, importance and priority.

6. Contract Recruitment: It may be necessary to look out for top management positions
on contract basis from private sector banks and financial institutions to bring in global
experience for pushing the agenda of reforms.

7. Change Management: It is extremely important to take the unions and associations of

officers into confidence on the need for drastic changes. A sustained internal
communication and workshops about change management within the banks would be of
utmost importance for successful implementation of new ideas.

The ministry of finance, RBI, and the banks need to look for an out of box solution to tap
this unusual opportunity for ushering long overdue reforms in the banking sector with a
paradigm change.

Vijay M. Deshpande
Corporate Advisor,
Strategic Management Initiative,
Pune

January 15, 2010

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