Process Innovation in the Indian Banking Industry

The crisis in the international financial markets had been simmering for quite some time.
However, its effects are now evident with the collapse of some of the leading financial
institutions.
While India has not been as seriously impacted by the global financial turmoil, the current
credit crunch has affected all sectors of the Indian economy. On the one hand, the Indian
banking industry is witnessing rapid change given the evolving regulatory environment, rapid
technological advancements, heightened competition and consolidation. On the other hand,
with the global recession looming, the industry is now exploring process innovation and is
more aggressively adopting technology.
ValueNotes along with the Indian Banks' Association (IBA) conducted a conference on
"Process Outsourcing in the Indian Banking Industry" on January 6th to address the
immediate issues concerning the banking industry. There were several speakers from the
banking industry including HDFC Bank, Punjab National Bank, Bank of India, IDBI, who
spoke on the issues and concerns of the banks. There were also some service providers such as
Intelenet, MphasiS BPO, HTMT Global and Shell Transource who were present at the
conference. These service providers talked about their experience with the international banks
and spoke about issues related to vendor selection and process transition.
Inaugurating the conference, Dr. K Ramakrishnan, Chief Executive, IBA talked about the
economy and the banking sector in his opening remarks. He said "The country will see
difficult times for at least another one year and in these trying times the question that most
banks are asking themselves is - How do I still lend and keep the portfolio intact?" He
emphasized that this is a time to look internally and examine and set processes in place.
Outsourcing in the Indian Banking Industry
Globally, the banking and financial services sector has been at the forefront of the outsourcing
movement. Third party service providers have also built greater processing and analytical
capabilities and are able to handle more complex functions like financial modeling and equity
research. In contrast with global evolution of outsourcing, the Indian banking industry has
been slower to outsource.
The Indian banking Industry is highly fragmented. There are banks ranging from small co-
operative banks (presence limited to a few branches in a city) to large nationalized
commercial banks like SBI with over 10,000 branches (one of the largest banking network in
the world). The Indian banking Industry is dominated by PSBs with 70% market share.
Further, there are different issues that concern the Indian banks when outsourcing.
Harsha Pai, General Manager, Sparsh BPO (part of Intelenet) touched upon the issue of
vendor selection and the necessary parameters while selecting a suitable vendor. Several
attendees said that Indian banks were wary of outsourcing especially given the client
confidentiality issues and the associated risks. According to Pai, "Initially, international
banks had also certain concerns about outsourcing, however, now a majority of the banks
outsource a wide range of services to third-party service providers. Indian banks need to
clearly understand and convey to the service providers what is truly confidential".
While there were some apprehensions about outsourcing, there were also banks such as
HDFC Bank, Bank of India and Punjab National Bank who shared their experiences about
outsourcing and its rewards. BinduMadhav Tikekar, Senior Vice President & Regional Head -
Wholesale banking Operations, HDFC Bank talked about the rewards in the form of cost
effectiveness, reduction in technical staff and low implementation and operational costs.
However, he also cautioned the banks about the risks associated with outsourcing.
Gaurav Bhatia, Vice President) BFS Solutioning Head - BPO, spoke about process transition -
possibility and plausibility. With the help of several case studies he drove home the point that
processes are crucial for outsourcing. Banks need to standardize and document every process
before they can initiate outsourcing.
Process Innovation and Technology
In India, outsourcing of processes is largely constrained by the RBI regulations and resistance
from trade unions. According to Arun Jethmalani, CEO, ValueNotes, "Aggressive adoption of
IT and centralization of operations have served as a key enabler to outsourcing of business
processes in the banking industry." Other factors such as growth in the banking industry,
deregulation, increasing competition, consolidation and improving benchmarks in the industry
are driving the outsourcing of business processes.
PSBs have been sluggish in adopting new technology as compared to global banks. Post
liberalization, with RBI tightening its regulations, PSBs have undertaken massive
computerization to achieve 'Total Branch Automation'. With privatization and increasing
competition, all the large banks are now aggressively implementing 'Core Banking Solutions'.
There is increasing focus on technology as evidenced by more and more PSU banks going for
aggressive computerization and transferring their processes into some technology platform or
other. While a few large PSBs have been quick to respond to competitive pressures by
introducing new services, investing in technology and acquiring capabilities like marketing
and sales, others lag behind.
Sanjay Sharma, MD & CEO, IDBI Intech Ltd spoke about leveraging technology for process
innovation. He argued that "Banks still need to reach the level where processes are
streamlined in a manner so that there is consistent customer service in every branch on any
bank."
P A Kalyanasundar, General Manager, Bank of India said that "Unlike the new generation
private and foreign banks, PSBs come with a legacy. The biggest challenge that PSBs are
faced with is completeness of data. This poses a hurdle when a bank decides to outsource."
On similar lines, R I S Sidhu, Chief General Manager (IT), Punjab National Bank said that
"While banks need to invest in technology, it is a challenge for them to implement technology
and train their staff. Explaining the marked difference when talking about technology in a
PSB, he said that until recently there was very little 'technology' for the banker and processes
were largely manual procedures, however today technology implies enterprise wide data
warehousing."
Most banks have partially outsourced their IT related requirements and matured in terms of
their understanding of risks and advantages in outsourcing. We believe that with greater
success in IT outsourcing, banks will be more inclined to outsource their business processes
and thus leverage on the benefits and economies gained through investments in IT.

Emerging Opportunities in the Indian Banking BPO Industry

Indian banks are currently witnessing robust growth under the influence of a changing
regulatory environment, rapid technological advancements, heightened competition and
consolidation. This changing landscape in the banking industry is driving banks to explore
the outsourcing option to achieve efficiencies.
The banking industry was one of the first to outsource business processes to third party
vendors in the Indian market. Banking is also one of the large segments in terms of total
outsourcing opportunity in the domestic BPO industry.
The total opportunity for outsourcing in the banking sector is estimated at Rs. 11.2 b for
FY08. Our research suggests that little over one-third of this opportunity is currently being
met. The majority of revenues are earned from voice-based services in sales and marketing.
Services off shored
Most of the large banks outsource entry level services like data entry, digitization, data
preparation and validation etc. These services do not require domain expertise in banking and
can be easily outsourced. Also, sales and marketing activities like loyalty programs, outbound
sales and inbound customer support are easily outsourceable.
A majority of the vendors primarily provide voice-based CRM services to large banks. These
vendors include large international BPOs (like IBM-Daksh, MphasiS, etc.), BPOs with
substantial focus on domestic market (like InfoVision, Intelenet, etc.).

Immediate opportunity in value added services

Over the last few years banks have started offering a number of value added services to grow
their business. Banks are increasingly outsourcing these value added services in order to
quickly bring new products to the market and rapidly scale up across locations.
Typical value added services offered by banks include Bill payments, Mobile banking,
Inbound Remittances, Tax Payments, Insurance Payments, D-mat facility, Market updates
etc.

Banks and Services Outsourced

Value- Added
Banks outsourcing these services
Services
HDFC, Citibank, ABN Amro, State Bank of India, Punjab
National Bank, Bank of India, IDBI Bank, Central Bank of
Electronic Bill
India, Union Bank, Syndicate Bank, Corporation Bank, Kotak
Payments
Mahindra Bank, ING Vysya Bank, Centurion Bank, Dena
Bank, Bank of Baroda
ATM
ICICI, Corporation Bank, HDFC
Outsourcing
Self - Bank ING Vyasa Bank

Outsourcing value added services relieves banks of financial and manpower investments in
building infrastructure required to offer the service. In fact, several of the private banks are
leveraging technology to outsource services, which enable them to ramp up their presence
quickly in new markets.
We believe that as the banking industry matures in its outsourcing initiative, the demand for
quality value added services is likely to gain prominence in the long term.
Outsourcing in the Indian Banking Sector: Gaining Momentum

Indian banks are currently witnessing robust growth under the influence of a changing
regulatory environment, rapid technological advancements, heightened competition and
consolidation. This changing landscape in the banking industry is driving banks to explore the
outsourcing option to achieve efficiencies.
• SBI, the largest Indian PSB outsourced its customer support operations to MphasiS, to
provide voice-based inbound services.
• HDFC Bank outsourced its non-core back office activities to Sai Seva Business
Solutions, a rural BPO.
• InfoVision has over 14 banks as its clients and provides both voice and non-voice
services
Indian banks are currently witnessing robust growth under the influence of a changing
regulatory environment, rapid technological advancements, heightened competition and
consolidation. This changing landscape in the banking industry is driving banks to explore the
outsourcing option to achieve efficiencies.
The total opportunity for outsourcing in the banking sector is estimated at Rs. 11.2 b for
FY08. Our research suggests that little over one-third of this opportunity is currently being
met. The majority of revenues are earned from voice-based services in sales and marketing.

Services Outsourced by Indian Banks

Given the regulatory and other constraints, the outsourceability of processes is thus
determined predominantly by two factors - their classification as core service and the strategic
value of the process.
• Core Processes: These are classified as core process by RBI or the process
categorized under KYC norms
• Strategic Value Processes: Activities/ Processes with strategic importance to banks
Core and Non-core processes
Core Processes Non-Core Processes
Product Strategy and Policy, New
Product Development & Planning, Document & Reporting, International
Strategic Value Advertising, Credit Collateral Evaluation, Banking, Value Added Services, IT
Risk Management, KYC Norms, Anti- Services
Money Laundering, Alliances

Payment Processing, Collections,

Data Entry, New Account Opening,
Accounts Closure, Check & Loan
Loyalty Programs, Corporate
Non-Strategic Va Processing, Lease Management,
Communications, Sales and
lue Reconciliation, Transfer Pricing, Asset
Marketing (Inbound customer care,
Management, Funds Management,
Outbound Sales), Reconciliation
Account Transaction Monitoring

Source: Value Notes Research

Most of the large banks outsource entry level services like data entry, digitization, data
preparation and validation etc. These services do not require domain expertise in banking and
can be easily outsourced. Also, sales and marketing activities like loyalty programs, outbound
sales and inbound customer support are easily outsourceable. Currently, there are around 15 to
20 large vendors providing BPO services to various banks. A majority of the vendors
primarily provide voice-based CRM services to large banks. These vendors include large
international BPOs (like IBM-Daksh, MphasiS, etc.), BPOs with substantial focus on
domestic market (like InfoVision, Intelenet, etc.). In addition to large BPOs, there are several
other midsized and small BPOs primarily offering low value BPO services to banks.
BPO Vendors
Vendors Key Clients (Banks)
Intelenet Citibank, ABN Amro
FirstSource ICICI Bank
InfoVision HSBC, ICICI Bank
MphasiS SBI
Future CareTel ICICI Bank, GE - SBI, State Bank of Patiala
Outlook Aegis BPO HDFC Citibank, ABN Amro
Source: ValueNotes Research •With
greater
success in IT outsourcing, Public Sector Banks will be more inclined to outsource their
business processes thus leveraging on the benefits gained through investments in IT.
• Foreign banks having captive centers servicing their global and Indian subsidiaries are
unlikely to entirely hive off these centers to third party vendors in the near term.
However, some of the services from the captive centers will gradually see their way to
third party vendors over the next few years.
• The scope for outsourcing will widen in the long term with customers migrating to
new delivery channels (like mobile banking) coupled with implementation of CBS in
finance and HR.
With strong technology platform and aggressive expansion plans private and foreign banks
will drive the growth in outsourcing. Backed by a strong industry growth and phased de-
regulation, we believe that outsourcing in the banking sector is set to gain momentum over the
next few years.

Global banks banking on India

Whether Citibank (NYSE:C), Barclays (NYSE:BCS) or ANZ (NYSE: ANZ), the global
banking community is looking up to India like never before.
Cost reduction is a huge driver…
The proposed buyout of ABN AMRO Bank by Barclays is expected to translate into a staff
reduction of 12,800, with another 10,800 positions set to be offshored. The integrated entity
expects to make use of ABN AMRO’s shared services facilities in lower cost destinations,
especially in India where ABN AMRO has a strong back-office presence. Meanwhile, ANZ
Grindlay’s will expand its workforce in its software development center in Bangalore and will
transfer additional computer development work from locations including Australia and the
UK.

Earlier in April, the Citi Group announced that it expects close to 17,000 job cuts as part of a
restructuring plan, and intends to move out over 9,500 jobs to lower cost destinations in the
US and overseas. With over 11,000 employees engaged in offshored services in India, there is
a lot of expectation about bulk of the jobs moving to India.
But a dual opportunity beckons
A study conducted by ValueNotes in 2006 brought out that almost 50 percent of the world’s
largest banks in terms of asset size are offshoring to India. But apart from leveraging the
outsourcing success of India, the domestic banking industry is throwing up unique
opportunities that are attracting global banks to enter the mainstream banking sector in India.
Rapid economic growth and financial sector reforms have created enormous demand for
banking and financial services in India.
A large number of global banks have established a base in India in the last decade. There are
currently more than 33 multinational banks that operate alongside India’s private and public
sector banks. Although the foreign banks have limited presence especially outside of the
urban areas, they have managed to compete so far by targeting different niches – such as
wholesale, investment and private banking.

For instance, Citibank has also made India a key element of its business strategy. The bank
has created a network spanning more than 50 Indian cities and has made its mark in corporate
banking by focusing on credit card customers and small and medium enterprises. It is now
expanding to other segments of banking in India. Similarly, HSBC, Standard Chartered, ANZ
Grindlays, etc have leveraged the domestic opportunity, besides their offshoring base.
Going Forward
The push factor for outsourcing to lower cost destinations is clearly the rising cost of
operations, especially non-core services, in Western economies. ValueNotes estimates predict
that offshoring of banking and financial services jobs to India will increase at a CAGR of 35
percent in 2007. About 168,000 employees are likely to be engaged in providing offshored
services to global banking and financial institutions this year.
On the other hand, double-digit growth predictions about the potential for the banking
industry, especially retail financing and real estate make it attractive to choose India. The
Central Bank in India – the Reserve Bank - is adding to the pull factor by continuing banking
reforms, especially in terms of allowing foreign direct investments and acquisition of smaller
and regional Indian banks.