C O N N

contentsC O N T E N T SFrom the EditorSpecial FeaturesStrategies to improve : Customer Service in Banks..................................................................................07-- M. D. MallyaThe wheels grind slowly, but surely - for the bank customer ....................................................................14-- Smt. K. J. UdeshiBest Practices in Customer Service in Indian Banks : An Economist's Perspective ...................................17-- M. R. DasCustomer Service in Banks - Best Practices ...........................................................................................21-- S. N. Sharma & L. P. PadhyCustomer Service - Best practices .........................................................................................................27-- L. SrinivasanCustomer service - best practices in Union Bank of India ........................................................................29-- V. L. Vaidya & M. K. NandaCustomer Service in Banks - Banks as Customer Service Champions .....................................................34-- K. J. PaulCustomer Service - A Study about the Present Practices and Challenges ................................................36-- Venkadasala Moorthy A.Performance of Public Sector Banks in the New Economy : A Comparison with Private Sector Banks ......43-- Pankaj K. Agarwal & Dr. R. N. RaiMicro Finance Institutions in India - Their role and relevance in Financial Inclusion ..................................52-- Dasarathi MishraBook ReviewsFinancial Policies and Everyday Life - The Indian Context ........................................................................60-- Prof. R. D. PandyaBrick by Red Brick .................................................................................................................................62-- P. Bala ChandranBank QuestVol. : 82 No. : 4October - December 2011(ISSN 0019 4921)HONORARY EDITORIALADVISORY BOARDV. K. KhannaSharad KumarRupa Rege NitsureMohan N. ShenoiHONORARY EDITORR. BhaskaranThe views expressed in the articles andother features are the personal opinions ofthe authors. The Institute does not acceptany responsibility for them.uesKeeW leLee Dev³e j®eveeDeeW ceW J³ekeÌle efkeÀS ieS efJe®eejuesKekeÀeW kesÀ efvepeer efJe®eej nQ ~ uesKekeÀeW Üeje J³ekeÌle efkeÀSieS efJe®eejeW kesÀ efueS mebmLeeve efkeÀmeer ÒekeÀej mes GÊejoe³eerveneR nesiee ~The Journal of Indian Institute of Banking & Finance October - December 2011 1

special featureINDIAN INSTITUTE OF BANKING & FINANCEndKohinoor City, Commercial-II, Tower-I, 2 Floor, Kirol Road, Kurla (W), Mumbai - 400 070.Tel.: 91-022-2503 9604 / 9746 / 9907 • Fax : 91-022-2503 7332Telegram : INSTIEXAM • E-mail : iibgen@bom5.vsnl.net.inWebsite : www.iibf.org.inGOVERNING COUNCIL MEMBERSPRESIDENT - M. D. MallyaVICE PRESIDENTS - M. V. NairRana KapoorMEMBERSAnantha KrishnaS. K. BanerjiY. K. BhushanK. R. KamathS. RamanA. K. MisraK. RamakrishnanT. C. A. RanganathanArun KaulT. M. BhasinPratip ChaudhariS. KaruppasamyR. BhaskaranDilip MavinkurveJ. P. DuaArundhati BhattacharyaAllen C. A. PereiraM. BalachandranM. NarendraMANAGEMENTR. Bhaskaran, Chief Executive OfficerP. Bala Chandran, Dy. Chief Executive OfficerA. R. Barve, Director of ExaminationsD. R. Wazkar, Director of AdministrationMISSIONThe mission of the Institute is to developprofessionally qualified and competent bankersand finance professionals primarily through aprocess of education, training, examination,consultancy / counselling and continuingprofessional development programs.O³es³emebmLeeve keÀe O³es³e cetueleë efMe#eCe, ÒeefMe#eCe, Hejer#ee,HejeceefMe&lee Deewj efvejblej efJeMes

editorialDr. R. BhaskaranChief Executive Officer,IIBF, MumbaiBanking is like any other business. As such customer satisfaction is important forbanks. However, the issue of customer service in banking goes beyond the normalbusiness sense because banking is an essential economic activity. The fact banking isalso a public utility makes customer service all the more important. Generally, it is seen thatcustomer service gets more attention and talked about in the case of highly regulated business.Banking, Insurance, PSU etc come under regulators. It is often felt that when a business is anessential (utility) economic activity the customer is not treated fairly and hence regulatorsintervene to ensure fair practices. What makes service in banking complicated is the fact thatbanks render financial services, the products are of great variety and the terms are not easilyunderstood.There are nearly 853 million (2010) deposit and loan accounts. These customers hold 228million debit cards, 18 million credit cards, and 455 million transactions are put through theelectronic systems. This is accomplished through 74,130 (2011) branches, 74,505 ATMs andnearly a million employees of the banks. On an average the number of accounts per employee isless than 100! Moreover as the banks are fully 'core banked' the number of customers will be bitlower than the number of accounts listed above. IT has made banking much easier. Also many ofthe housekeeping tasks which were previously holding the attention of the employees have beenmechanized making the employees free to attend to customers. It therefore follows that thereshould be better customer service. However the customer complaints are on the increase. Issuesrelated to credit and debit cards, issues related to the non adherence to the fair practices oflenders, pensioners, mis-selling dominate the complaints. Yet the amount of discussion andconcern heard on the issue points out to the need for attitudinal change on the part of the bankers.That the customer service needs to be given top priority can also be inferred by the fact that therecommendations of the RBI constituted committee on customer service have been mentioned bythe previous committees.IIBF is involved in the issue of financial literacy which will improve customer awareness. Thecertificate course on customer service is an important offering from the institute.The Journal of Indian Institute of Banking & Finance October - December 2011 3

editorialThis issue of Bank Quest is mainly focused on the theme 'Customer Service-Best Practices', andthe first article is on 'Strategies to improve Customer Service in Banks' by Mr. M. D. Mallya,Chairman & Managing Director, Bank of Baroda. The author highlights the need to put inplace a strong service architecture supported by well aligned strategies. The article recognizes thatthe ability of banks to perceive customer's needs and bank's groundwork to offer quality service tomeet such needs will be the differentiating factors among different banks in terms of quality ofservice. He cites operational and softer parts of customer service as two broad building blocks ofcustomer service and suggests strategies around creating a culture of operational excellence,building customer relations teams, increasing sensitivity to customer needs, sharing know-howwith customers, strengthening research to perceive customer aspirations, institutionalizingfeedback system, learning from recommendations of various committees on customer service,incentives and motivation to best customer service units through awards. The author advocatesthe need to develop a customer centric organizational culture and operational efficient deliverymodels.Smt. K. J. Udeshi, former Chairperson, Banking Codes & Standards Board of India (BCSBI)in her article 'The wheels grind slowly, but surely-for the bank customer' points out that with thederegulation of savings bank deposit interest rate, the focus on bank customer has finally come tocentre stage. She also explains the background of setting up of Banking Codes and StandardsBoard of India and its impact in meeting customer expectations, which are based on threeparameters fairness, transparency and systemic change. BCSBI will continue to exercise its roleof a watchdog and ensure that compliance by banks does not slip as there is a requirement ofchange in mind-set and greater accountability to implement.'Customer service is a perennial topic for discussion for the service sector in general and bankingin particular' says Mr. M. R. Das in his article 'Best Practices in Customer Service in IndianBanks: An Economist's Perspective' He articulates best practice in customer service in terms oftimeliness, explaining terms and conditions, exuding trust, giving exclusive attention, use ofcomputers, ombudsman, banking codes and standards, motivating customers to use technologyproducts and customer feedback. He asserts that the customer service to the financially excludedis more vital and difficult than to the financially included and emphasizes the need forcollaboration among banks for resource optimization and achieving results.The next article in this issue is 'Customer Service in Banks - Best Practices' written byMr. S. N. Sharma and Mr. L. P. Padhy. They explain the significance of customer service in4 October - December 2011The Journal of Indian Institute of Banking & Finance

editorialBanks and impact of competition on customer service. They point out that various factorsinfluencing customer service are human resources, products/services, processes, delivery channels,feedback and complaints grievances redressal mechanism, market studies, institutionalinitiatives, and technology. They have suggested that various best practices for enhancedcustomer service such as use of online channels, professional sales management, simplicity ofproduct portfolio, better decision making, customer-centric Business Process Re-engineering(BPR), Customer Relationship Management (CRM) and benchmarking customer service etc.In his article 'Customer Service – Best Practices', Mr. L. Srinivasan covers the complete changeover in the banking from ledger based manual accounting with simple products and services totechnology enabled complex products and speedy services to suit different types of customers. Heconcludes that technology and human values should go hand in hand and work in tandem.The next article 'Customer service - Best practices in Union Bank of India' by Mr. V. L. Vaidyaand Mr. M. K. Nanda explain various initiatives taken by Union Bank of India, beginningwith the Nav Nirman exercise to change management programme. ' Under this the bank will betraining all the front line officers country wide for enhancing the soft skills for improvedcustomer satisfaction.' The article also explains other initiatives such as customer grievanceredressal policy, compensation policy, code of commitment to deposit customers and SMEcustomers.Mr. K. J. Paul begins his article 'Customer Service in Banks - Banks as a Customer ServiceChampions' with the remark that the customer service in banks is driven by a vision to be asolution provider with customer centricity and a mission to earn customer loyalty. He opines thatbuilding long-term customer loyalty is sine quo non for bank's survival, success and progress. Helists the most critical twelve needs of customers as delightful dozen and emphasizes the need forfulfilling both emotional and material needs of the customers. He states that to be a customerservice champion one needs to Care More Than Other Think Is Wise.In the article titled 'Customer Service - A Study about the Present Practices and Challenges',Mr. A. Venkadasala Moorthy analyses the present customer service practices such as an enquiryor May I Help You counter, comprehensive Notice Board, Customer Education Series, CustomerService Committee Meetings, Citizen's Charter in the banking industry in India. He also liststhe recommendations of committees on customer service like Goiporia Committee, DamodaranCommittee etc. The challenges facing the banking industry in providing customer services areabout the suitability of products or services, inadequate knowledge of products and failureThe Journal of Indian Institute of Banking & Finance October - December 2011 5

editorialto meet commitments. In his view 'ideal customer services' can be reached through customerawareness, staff training, proper redressal mechanism, technology and non-discrimination inservice.This issue also carries an article of Mr. Pankaj K. Agarwal and Dr. R. N. Rai based on theirstudy titled 'Performance of Public Sector Banks in the New Economy: A comparison withPrivate Sector Banks'. In the study they have tried to compare the performances of private andpublic sector banks in India with the use of globally accepted CAMEL model. The finding of thestudy contrasts the popular view that PSBs have better capital adequacy and liquidity than thatof the private sector banks.The issue also includes an article 'Micro Finance Institutions in India- Their role and relevancein Financial Inclusion' by Mr. Dasarathi Mishra which captures the journey of Microfinancesector in India. It covers a brief account of extent of financial inclusion, developmentmicrofinance institutions in India and recent development in the sector. The author raises someconcerns for public policy and lists the challenges in Microfinance Sector.This issue also carries two book reviews; 'Financial Policies and Everyday Life-The IndianContext' written by Mr. S. S. Tarapore and 'Brick by Red Brick by Prof. T. T. Ram Mohan. Wehope it will be of great use to you.We solicit your suggestions and feedback for improvement.(Dr. R. Bhaskaran)6 October - December 2011The Journal of Indian Institute of Banking & Finance

special featureStrategies to improve : Customer Service in BanksM. D. Mallya *Banking industry witnessed substantial growth in termsof business levels and is all set to scale new heightsin the inclusive environment. It is fast penetratinginto the hinterland further expanding its coverage.The customer base, branch network, and the alternatedelivery channels have grown manifold in the lastfew years. Along with the increasing volumes, thecustomer expectations are also rising concomitantlyand the banks too are gearing up to improve the qualityof customer service. Maintaining a sustained focuson the quality of customer service, while servicinglarger number of customers is indeed a challengingproposition.Banks need to put in place a strong service architecturesupported by well aligned strategies to harness thepotentiality of newly strengthening relationships. Infact, greater coordination, collaboration, better vendormanagement and improved skills of people managementcome under focus. Technology and Business processRe-engineering are the two latest building blocks tomake technology work for customers. Simplificationof processes and procedures and mapping them insync with technology architecture needs a wide scalere-engineering. Most banks are putting revisedprocesses in place to improve the turn around time andoperational efficiency.In fact, the Service industry is meant to deliver whatits customers precisely need. The solution lies inunderstanding and providing what the customerseeks. Therefore, the competitive differentiator of aservice organisation, more importantly for banks,depends on their ability to customise the class andquality of service to meet their client needs. In a fastdiversifying banking industry, it is enterprising tobench mark its quality and range of services tomatch customer demands. The leadership, vision andability of banks to perceive what customers wouldneed in future can make a lot of difference in shapingup the preparedness of banks to the next level to availthe first mover advantage.A couple of decades back, banks usually werecapable of offering almost a similar range of productsand services to customers at the same price. Therewas hardly any scope to create any unique valueproposition. As a result, there was rarely any differencein the product profile and pricing. The interest ratestoo were fully regulated. It was a similar model ofbusiness for banks to provide routine type ofcustomer service. In this background beginning withthe banking sector reforms initiated in 1991-92, thefocus on the quality of customer service, employeeorientation in banks began to change for better. Theold adage - 'Customer is King' gained attention inBanks in a real sense. Policies and system reformswere fast transforming to turn banking space intocomfort zone for customers. The standard of customerservice began to improve attracting new customerbase.Customer service has come to occupy the centrestage of operations in the banking industry. Thebanking system in India today has perhaps thelargest outreach for delivery of financial servicesand is also serving as an important conduit to supportthe growth momentum. While the coverage has beenexpanding day by day, the quality and content ofdelivery of customer service has assumed newdimensions. Banks began to improve capabilities tohandle the increasing demands and expectations* Chairman & Managing Director, Bank of Baroda and President, IIBF.The Journal of Indian Institute of Banking & Finance October - December 2011 7

special featureof the customers. Banks have to make more effortsto garner better market share, of which the qualityof customer service has come to be the distinguishingfactor.Moreover the vast network of branches spreadacross the entire country with millions of customersbegan to create wider opportunity to add more value.The new blend of variety of products and services, thevariety of delivery channels etc have added to theenormity and complexity of banking operations inIndia to keep service levels improving. Thus the urgeto improve the quality of customer service requiresa relentless effort and continuity in putting optimumresources together. A series of studies have beenconducted by various committees such as the TalwarCommittee, Goiporia Committee, Tarapore Committeeetc., to bring about innovative methods and meansto improve the performance and procedures involvedin the dispensation of hassle-free customer service.These committees have made significant contributionto improve the quality and reach of customer services.a) Significance of quality of customer service :The banking industry is predominantly a customeroriented business and good customer service isthe key to its growth and stability. With intensecompetition in the banking industry, customer servicebecomes the sole differentiating factor to be leveragedto stay ahead in the market and capture new linesof business. With the rise in the customer base anddiversifying customer needs the customer aspirationsare always dynamic and shifts with the developmentsin the working environment. With the rise in thestandard of customer service, the customer awarenessgrows, and hence banks would be required to gearup for providing more efficient and at the same time,cost effective services leveraging the technologicalcapabilities. Customer retention is also going to bea key factor for banks. It would require banks towork on different strategies and showcase theproduct mix with the help of technology to satisfythe rising customer expectations so as to retain thecustomer patronage.Though several committees have earlier worked onidentifying measures to improve customer service,Reserve Bank of India had set up a committeein May 2010 to recommend strategies in the lightof the technology led banking environment developedin the industry more particularly in the last decade. Thecommittee was led by Chairman, Shri M. Damodaran.The Committee Report submitted recently broughtout many innovative measures that can changethe service standards in the Banks. More focushas been given to improve banking services renderedto retail and small customers and pensioners. Thestructure and efficacy of the existing grievance redressalmechanism, the functioning of Banking OmbudsmanScheme, and possibility of leveraging technologyfor better customer service have received specificspace in the report and has recommended stepsfor their improvement. Meanwhile, in the recentlyconcluded Ombudsman Conference, 10 action pointswere identified, which are essential to protect therights of the customers. These have been put inaction to improve the quality of customer service.These efforts when put together can transformthe standards of banking services in India. Thesedevelopments put together has brought to fore thequality of customer service as a key enabler tooccupy more strategic space in the banking industry.In a bid to occupy more space, banks began to offerhigher class of service to different customer segments.b) Developments in the customer service architecture :The deregulation of interest rates, entry of highermodes of technology, differential pricing, servicecharges, unique product features, proprietary deliverymodels etc have created an environment to developbank specific hybrid offerings for customers leadingto more competition. The individual efforts of banksto woo the customers with product and price variantscreated a different market environment. Moreover, theadvancement in the usage of latest technology broughtseminal differentiation both in the range and qualityof services. The more sophisticated the technologyand skill levels of its people, the more customisationof products / services were made possible heightening8October - December 2011The Journal of Indian Institute of Banking & Finance

the competition. Given the fast development ofinfrastructure in the banks in terms of advancementin the technology, setting up of more efficient e-deliverymodels, institutionalisation of the concept of centralisedmarketing and sales and several other customer centricsettings made a difference in the way banks serve thecustomers. Though a lot of development has taken placein inculcating a culture of customer centricity in banks,still a lot needs to be done to tap the emerging potentialityof the changing demographic profile. Thus in the postreforms era banks could put in place a robust servicearchitecture comparable to international peers creatinga facilitating customer service environment. Moreover,as part of Financial Inclusion efforts, a strong networkof Banking Correspondents was employed to provideeasy and convenient access to banking services. Theseextended touch points helped in providing services atremote locations.c) Customer needs are dynamic :At the same time banks need to understand that asIndian economy gets more closely integrated with theglobal market, the customers too experience a higherstandard of service that changes their perception aboutthe service. Banks therefore should be able to upgradetheir capacity and service orientation accordingly.While banks are set to embark on taking the quality ofcustomer service to the next level, it is necessaryto keep in mind that customers too are operating in ahighly dynamic and well integrated financial marketsoperating in a cross country environment. Hence, theirneeds also are set to change fast. The bench markof expectations of service levels keeps moving up. Thequality of service that satisfies a customer today maynot satisfy the customer wants of tomorrow more sofor younger generation of customers. Banks thereforeneed to reinvent their service level standards to remaincustomer focused. A given level of product profile andservice may not be able to meet the needs of customersat different points of time. Hence, to my mind, a set ofbroad strategies will have to be designed in the mediumto long term to stay closer to customer aspirations and tocontinue to win the customer confidence that can be thecompetitive differentiator. In framing customer servicespecial featurerelated policies banks should keep in mind, the changingoperating environment, dynamics of customer needsand enabling tools in the banking system. Customerservice has broadly two building blocks. One is theoperational part dependent on technology processes,procedures and the efficiency of infrastructure and theother is the softer part comprising the human element,the emotional value, demonstration of care & concern forthe customers. Putting these tenets of customer servicetogether the strategies could broadly centre around thefollowing :1. Create a culture of operational excellence :Banks need to highlight the significance ofmaintaining the operating enablers such ashardware, software, backup gadgets in their bestperforming conditions as an organisational policy.The service level agreements, response systems,trouble shooting etc. have to be planned and kept inimpeccable condition which can go a long way inimpressing image and to build customerconfidence. The fall back systems and disasterrecovery plans should be put in place. A businesscontinuity plan will also be essential to movetowards operational excellence. Having movedfrom legacy system to core banking, the workflows,procedures, housekeeping systems and otheroperational intricacies will have to be aligned withthe computerised environment to derive its fullsynergy. Neither the people nor the systems alonecan provide satisfying experience to customers.Optimum application of technology and humanintelligence will have to work in tandem to reducethe turnaround time and to enhance operationalefficiency. Better aligned processes and operatingprocedures need to be reinvented to adapt to thecomputerised environment to derive the full synergyof the evolving architecture.Over the years technological innovation in bankingwas meant to achieve a broader reach in terms ofproviding efficient consumer banking and continuedits emphasis on inclusive growth. Further in order tomeet the demands of households and businesses,movement from 'class' banking to 'mass' bankingThe Journal of Indian Institute of Banking & Finance October - December 2011 9

special featureand quick transmission of information inexpensivelyand conveniently has been adopted. Banks havemoved a long way from the age of mechanization inthe Indian banks to the present age where banksare successfully experimenting with advancedtechnologies. Such technological advancement cansignificantly enhance operational excellence, theenabler to serve customers better. Thus a bankwhich closely integrates its technology strategy withits business strategy can certainly reap betterbenefits and reach the target customers using theright channels. It can also understand the value ofthe customers to the bank and optimize quality ofservice. The philosophy of 'sense and respond' tocustomers' needs can be more instrumental indevising strategies for cross-selling and up-selling.Such approach can go a long way in buildingsupport system for promotional and image buildingactivities of the bank.In the context of building a sustained culture ofoperational excellence, banks are increasinglyrealizing the need to understand their customerslike never before. Today's customer expects - ratheractually demands - to be treated as an individualconsumer providing business opportunity to thebank. They deserve to be considered more valuableto the banks than ever before; failure tocommunicate with these customers at the right time,through the right channel, with the right offer willslowly wear away the client base. Further,availability of a holistic 360 degree view of customerwould also facilitate the banks to design combopacks demonstrating cost / value efficiency. Hencestrategies have to be centred around buildingoperational efficiency, the integral part of customerservice.2. Create customer relations teams :Increasing customer base is the manifestationof quality of service and networking abilities ofthe teams leading the line functions. ut it is not thelone contributory factor. Networking and constantcustomer contact is more important. Customerexperience is no longer the sole domain of thebranch. It exudes in everything the bank does.Gearing up every building block in the chain toprovide a better experience to customers will beessential. An emerging field in capturing customerexperience is to undertake behavioural research.Moreover marketing is the area of value innovationwhich can be an eventual game changer in buildingrelations. Innovation in providing the fine customerexperience is no longer a choice but a necessityand more importantly a competitive weapon. AnInnovations group or network created acrossthe bank can be a useful tool to generate newideas and get connected with the people. Inbuilding customer relationship, mapping customeraspirations is essential. Formation of centralisedsales and service teams can be a right model topenetrate fast in the market. It is more essential tostrengthen the network of post sale customerservice to win customer confidence. Relationshipshave to be based on sustained ability to serve andnot on transactional basis. A cohesive team ofknowledgeable people will be essential to cementthe customer relationship edifice.3. Increase sensitivity to customer needs :In a branch setting, the attitude, orientation,training of operating staff and their commitmentto serve customers assumes greater significance.The management needs to share its priorities withthe branch level staff to improve the responsesystem. With the diversification in the products /services and changing profile of customers, banksneed to focus more particularly to improve theresponse system at all levels. The care, concernand the policy of customer centricity shouldmanifest in the form of quick response to customerqueries. The technology led delivery channelscan be useful enablers to attend to the customerneeds. The new age customers accord moreimportance to time management and staffhave to be trained to be time sensitive. Thebranches / call centres and customer touch pointshave to be oriented to provide quick responseand offer end to end solutions to customer needs.10October - December 2011The Journal of Indian Institute of Banking & Finance

The ability to articulate, customise and satisfy theirqueries can make a lasting impact in the minds ofcustomers. The time sensitivity to attend customerscan be another great soft differentiator which needsmotivation and sensitisation of staff.4. Sharing know-how with customers :In a computerised banking environment, oftencustomers find it difficult to operate the systemsof alternate delivery channels. Electronic Bankinginvolves remembering passwords, maintainingsecrecy of passwords, guarding against phishing,managing the operational intricacies of using ATMs/ Internet banking / mobile banking, electronickiosks and a host of other accessories andgadgets. As a part of customer service, bankscan launch user friendly leaflets and instructionmanuals in local languages, display play cards,signages in local language etc. to make customersmore comfortable in using alternate deliverychannels. Unless large number of customersmoves to electronic channels, the real benefit ofelectronic banking cannot reach them.Moreover with the financial inclusion makinginroads in villages, it will be essential to provide thecomfort to customers to operate the systems. Theemployees manning the branches should walk anextra mile to introduce use of new delivery channelsso as to make customers familiar with the operationprocedures. It should form part of customer servicein banks. We need to take up the responsibility tomake customers use the new systems in the longterm interest of their convenience. Banks have to goa long way in persuading customers to adopttechnologies. Banks need to allay the hesitationsand remove customer inhibitions in usingtechnology. Banks can also seek the help ofsatisfied customers in spreading awareness aboutthe benefits of technology channels.5. Strengthen research to perceive customeraspirations :Banks take strategic initiatives keeping customerconvenience in view. Once products / services arespecial featureoffered, it is essential to know how they are receivedby the customers. This will need a systematiccustomer interaction. Hence, banks should set upindependent research studies, obtain secondarydata, capture customer opinion on products /services and formulate customer centric policies.Field level research / studies will help bring forthconsumer views that can help formulate betterpolicies. The views of customers can help banksto further customise products / services and planmodifications or exit of products that outlived theirutility. Similarly the features of products can bealtered, innovation in delivery of services can beencouraged and empirical studies can form a strongbasis to formulate better customer centric policies.Hence investment on research needs to be treatedas a means to strengthen customer service. It ishigh time that banks invest on research studies as asource to get inputs for strategic planning to getmore closer to customer aspirations.6. Institutionalise Customer feedback system :The opinion of consumers holds great value instructuring future policies for a sustained qualityof customer service. Customer experience is nolonger the sole domain of the branch. It exudes ineverything the bank does and customers demanda better experience across the system and anydisconnect can disturb the process. The customerexperience, moment of truth and behaviouralaspects of staff forms the core value system toassess customer aspirations. It can be an eventualgame changer. Hence innovations in providingbetter customer experience is no longer a choicebut a necessity and more importantly a competitiveenabler. But the big challenge is to institutionalise asystem to collate, analyse and grasp customerexperience, map the delivery process anddocument them so as to use it as a framework tofurther improve the processes, procedures andcustomer service and delivery systems. Thereforeinstitutionalisation of a feedback system can be aneffective tool to improve systems and procedures.The Journal of Indian Institute of Banking & Finance October - December 2011 11

special feature7. Learning from the committees :Government of India and Reserve Bank ofIndia from time to time has been supportingbanks in providing better customer service.Several committees have worked on professionallines to make suggestions to improve the qualityof customer service. In the relentless pursuit ofbanks to improve customer service, variousagencies have been contributing to it. In 1975, theGovernment of India had appointed the TalwarCommittee on customer service in banks. In 1990,RBI appointed the Goiporia Committee on customerservice in banks. In 2004, the Tarapore Committeerecommendations led to formation of Board levelcommittees for monitoring customer service inbanks. In 2006, Reserve Bank of India appointeda Working Group to formulate a scheme toensure reasonableness of bank service chargesunder the chairmanship of Shri. N. Sadasivan.The recommendations of the various Committees /Working Groups reflected the need of the time inwhich the Committees / Working Groups were setup.Similarly at the bank level while planning toprovide best customer service, it is more importantto institutionalise systemic controls to check thequality of service delivered across the bank. It callsfor a broad spectrum of checks and balances thatcan capture the qualitative aspects of the service.Taking cue from the recommendations of learnedcommittees, banks can design systems / controls toderive better customer satisfaction levels.8. Award best customer service units :Creation of healthy competition among branchesin providing quality customer service is necessary.Banks can institutionalise appropriate in-houseawards / incentive schemes to recognise theoutstanding work in providing quality customerservice. A suitable assessment matrix bedeveloped to capture the granular components ofcustomer service. Assess them on sustained basisand reward the best branch and best employeescontributing to it. The parameters for assessmentof good customer service needs to be set after aninterface with the customers so that branchesare encouraged to serve customers to meet theiraspirations.9. Analyse CRM data to unveil future needs :CBS has immense potentiality to not only processlarge number of transactions but can amassa huge inventory of MIS for multiple applications.Hence, going beyond the transaction processing,CBS architecture can now be extensivelyutilised to collect data for Customer RelationshipManagement (CRM). The more we know about thecustomers, the better we can serve them. Customerdelight can be targeted only if we havecomprehensive data base. It will also unveilthe future needs and life cycle requirements ofcustomers. Banks will be in a better position tomeet the product needs at every stage of lifecycle right from providing educational loans, vehicleloans, professional loans, personal loans, homeloans, credit cards, insurance etc. Collection andanalysis of CRM data can be the right input to evenplan diversification into new lines of business. Sincemost banks are CBS enabled, they need to go to thenext logical step to put CRM in place to derive its fullsynergy.10.Maintain emotional connect with customers :In a technology led environment wherecustomer touch points are increasingly attendedby call centres, alternate delivery channelsand cash dispensing machines, the customersmay feel isolated without human interface. Insuch working climate, banks can come forwardto talk to customers personally, understand theirpain points and establish emotional connect.Relationship developed with personal interfacecan be more lasting often stretching beyondgenerations.In the whole process of improving customerservice, the efforts of banks were adequatelysupplemented by Reserve Bank, as the regulatorof the banking sector. It has been actively guiding,supporting and is actively engaged from the very12October - December 2011The Journal of Indian Institute of Banking & Finance

eginning in the review, examination andevaluation of customer service in banks. It hasconstantly brought into sharp focus the need forquality and introduced framework to ensure thatbanking services are available to common people.It also stressed the need to benchmark the currentlevel of service, review the progress periodically,enhance the timeliness and quality, rationalizethe processes taking into account technologicaldevelopments, and suggest appropriate incentivesto facilitate change on an ongoing basis through itsdirectives. Thus the role of Reserve Bank of Indiahas been a critical catalyst in improving customerservice in banks. Thus depositors' interest alsoforms the focal point in evolving policies for bettercustomer service in banks. It is one of the bestIndian ways to call on customers, hear their views,notice their presence and maintain live relationship.Such approach takes banking to a tipping point ofcustomer satisfaction.With the diversification in the consumer needs,heightened competition, banking system has transformedinto a responsive service entity committed to serve thecustomer with care and concern. As a part of bringingimprovement in the customer service, various measureswere taken by the banks, Reserve Bank of India, IndianBanks' Association and Government of India. They allwork in unison to bring about customer friendly reformsin various forms of service of banking system. Theirinvolvement and role works like a systemic force tobring qualitative transformation. Therefore in the currentcontext of intensified competition, customer centricityhas been the focus of every bank. Among the supportsystems, technology has become the epicentre of suchtransformation.These strategies need to be not only institutionalisedbut monitored rigorously to derive their synergy toimprove customer satisfaction levels. The new agecustomers have a different mindset. They are educated,fast and need quick response in the form of quality ofservice. They can change banks quickly if serviceis not up to mark. In the medium to long term,any dissatisfaction to customers can lead to silentspecial featuremigration of customers to competitors that can beanaemic to banks in terms of business and profitability.Banks need to be highly sensitive to the voice ofcustomers to ensure instant intervention to takecorrective steps. Since most customers do notcomplain, even a stray voice of dissatisfaction needto be attended with urgency. It is possible to maintaina leading market share among banks only if specificstrategies on continuous basis are implementedto improve customer satisfaction levels. Meetingcustomer needs has three distinct parts.1. Capturing what the customer needs.2. Analysing such identified customer needs toproduce the right products / services at optimumprice and operational efficiency.3. Delivering them as per customer convenience throughthe desired channels such as branch or e-channels.They are cyclical in nature evolving continuously overa time frame. Banks which can remain efficient toserve the customers to their best satisfaction cansustain in the market in the long term.It is not enough to have a range of products andservices, efficient technology, well entrenchedoperational procedures and large number of touchpoints, it is more important to motivate people inthe banks to make customers feel important in thebanking space. Friendly treatment of customers,smiling approach and readiness to serve them with apersonal touch will make all the difference in thequality of service. Hence, in order to compete weneed to develop a sustained customer centricorganisational culture and operationally efficientdelivery models.The Journal of Indian Institute of Banking & Finance October - December 2011 13

special featureThe wheels grind slowly, but surely -for the bank customerSmt. K. J. Udeshi *This article had to be rewritten entirely as the RBIannounced on October 25, a landmark measure in itsSecond Quarter Monetary Policy Review 2011-12 viz.the deregulation of savings bank deposit interest rate.With this measure the bank customer has finally comecentre stage. But for a better appreciation of all the effortsthat have gone into protecting the customer's interests itmay be useful to begin from the beginning.In 1975 the Government of India appointed a WorkingGroup, under the Chairmanship of Shri R. K. Talwar,to study the quality of customer service in banks, torecommend steps, to bring improvements, to meet theaspirations of customers. Since then, over the years,several Committees were set up by the RBI, whichmade suitable recommendations on various aspectsof customer service in banks. But, as the Committee onProcedures and Performance Audit on Public Services(CPPAPS) (Chairman: Shri S. S. Tarapore) pointedout, the recommendations of Committees on CustomerService did not translate into mandatory instructionsand are such that even if they are not implemented infull i.e. in letter and spirit, a bank's business, per se,would not be affected. The Committee also felt thatthere was an organisational gap in as much as the RBIbeing preoccupied with its larger role as Regulator andSupervisor is neither suited to perform micro regulation ofthe customer service function nor is it philosophicallyequipped to do this. The Indian Banks' Association (IBA)has no doubt played a complementary role in carryingforward RBI's initiatives for better banking service tocustomers and common persons but due to its limiteddomain of authority it could not be expected to play therole required to meet customer expectations. Likewise,Banking Ombudsman Scheme is tailored to deal withindividual grievances and does not deal with the systemicissue, which requires a wider approach.Thus, to fill in this institutional gap and to calibrate the banksagainst Codes and Standards based on best practices, theRBI set up the Banking Codes and Standards Board ofIndia (BCSBI) in 2006 as an autonomous institution, whichwould function as a watchdog of the banking industry. So,have customer expectations been met? Let us examinethis on three parameters of fairness, transparency andsystemic change.Fairness : The term is flexible and dynamic and it is notpossible or useful to produce a definition. What fairnessmeans may vary depending on the bank's business andits customers but whatever the business or customerbase, the fairness needs to be evident. One has to onlycompare the situation as it existed a few years ago to theexisting scenario to see the evidence. Negative optionmarketing, (e.g. some banks issued add-on credit cardsto family members of the primary cardholder withoutreceiving any request from the cardholder. No responsefrom the customer after issue of the card was takenas acceptance and the primary card holder was forcedto bear the charges levied for the add-on card); retailloan tie-ups, (e.g. for sanctioning retail loans somebanks insisted on customers availing of insurance inrespect of mortgaged house / property, collateral lodgedetc. from an insurance company with which they hada tie-up); changes in service charges / fees without noticeor intimation, classifying savings bank accounts as'inoperative' or 'dormant' without any notice or intimationetc. were all unfair practices that are not evident inthe current scenario. One sees every television channeladvertising the transformation to a “fair and lovely”person. The transformation from “unfair” to “fair” banking* Former Chair Person, Banking Codes and Standards Board of India.14October - December 2011The Journal of Indian Institute of Banking & Finance

practices has however taken place silently but theevidence is there for all to see.Transparency : There has been a sea change onthis front with banks informing the customer, at thetime of opening an account or availing a service, ofall charges payable. All charges are included in theTariff Schedule which is available for the perusal of anycustomer at each and every branch. The Tariff Scheduleis also displayed on the banks' website. Bank branchesare also mandated to have a bilingual / tri-lingualComprehensive Notice Board displaying the banksBase Rate, key interest rates on deposits, forex rates,availability of nomination facility on all deposit accountsand safe deposit vaults. Each and every bank branch isrequired to keep a folder for the perusal of any customer,which contains copies of the Codes, the BankingOmbudsman Scheme, Citizens Charter for currencyexchange facilities, design and security features ofcurrency notes, Tariff Schedule, Compensation Policy,Cheque Collection Policy, Grievance Redressal Policyand Security Repossession Policy. Despite all this, ifasymmetry of information does exist it is also becausethe customer does not feel obliged to know and be awareof all the information that is available to him.Systemic Change : The most critical change thathas taken place in banking customer service is inthe area of systemic changes. Every bank now hasa Compensation Policy, Grievance Redressal Policy,Collection of Dues and Security Repossession Policyand Cheque Collection Policy which are not onlyavailable for perusal in each and every branch butis also placed on the bank's website. The fact thatbanks are required to suo-moto compensatecustomers for loss / inconvenience caused due todelays, errors etc. is a big milestone in the history ofcustomer service. Another milestone has been thechange in methodology of calculation of interest onsavings account deposits from the lowest deposit overa fixed period of 20 days which prevailed for decadesand had led to undue enrichment of banks to themove to calculate interest on the average of thesavings bank daily product, which has benefitted bankdepositors tremendously.special featureMore importantly, the BCSBI plays a critical role inbringing about systemic change, that is to say, while theBanking Ombudsman redresses the individual customer'sgrievance, such redressal is translated by the BCSBI intosystemic change at the individual bank or industry level,as the case may be. So also, it is ensured by the BCSBIthat the complaints received by the BCSBI, result insystemic change wherever called for and does not justrest with the redressal of the individual's complaint.BCSBI in its designated role as watchdog, ensures thatbanks comply with the commitments made by them in the“Code of Bank's Commitment to Customers” and “Code ofBank's Commitment to Micro and Small Enterprises” andalso comply with all the regulatory requirements relatingto customer service. Because of the tight monitoringby the BCSBI through incognito visits, surveys, AnnualStatement of Compliance etc., the gaps in compliancewith customer service commitments and regulatoryrequirements relating thereto are narrowing.The recent measure by the RBI deregulating thesavings bank interest rate is a milestone in the historyof the bank depositor. The process of deregulationof interest rates began, believe it or not, way back,in the 1980s and the rate of interest on term depositswas deregulated in 1996-97. Although the issue ofderegulation of the savings bank interest rate wasexamined in the Reserve Bank several times it was notconsidered for implementation because it was felt thatthe time was not right. Regrettably, the savings bankinterest rate at 3.5% p.a. also remained unchanged bythe RBI from 2003 till May 2011, when it was increased to4% p.a. Thus, for decades, the bank depositor has notonly been getting a negative rate of return on his savingsbut has been passively and submissively subsidizingthe term deposit account holders and borrowers. Thederegulation of the savings bank interest rate should nowchange the scenario for the bank customer.In the current scenario there are points to be notedby bank depositors, banks, as also the regulator. In ascenario where banks compete with one another inoffering attractive interest rates the bank depositor willneed to be extremely cautious in not being swayed by thetemptation of greed. This is easier said than done. Also,The Journal of Indian Institute of Banking & Finance October - December 2011 15

special featurethe customer must note that there could be times whenthe rate moves downward and be prepared for it.The deregulation of the Savings Bank interest ratecoupled with technology will lead to product innovationsby banks. It would be in the interests of banks to ensurethat they explain the features of the product suitablyto the customer and document this rather than faceconsumer grievances later. Also, if banks succumb to thetemptation of increasing charges for services rendered tothe savings bank account holders, they would need tokeep in mind that bank customers now have a choice andmay exercise it. If the critical elements of fairness andtransparency are met by banks when a new product isintroduced or new charges are levied there ought to beno cause for complaint.A related issue which does not have a direct bearingon customer service but needs to be looked at, isthe role of the Deposit Insurance and Credit GuaranteeCorporation (DICGC) in the context of the deregulationof the savings bank interest rate. As on September 30,2010 the DICGC covered 1052 million deposit accountswith assessable deposits of `49,52,427 crores. The sizeof the deposits insured and the element of moral hazardinvolved in the current system of uniform premium pricingmust make DICGC recognize the urgent need to moveto risk-based premium pricing. Towards this end, it wouldbe necessary for DICGC to also undertake the rating ofthe financial soundness of banks and placing theseratings in public domain.At the last Banking Ombudsman Conference convenedby RBI in September 2011, the Governor hadindicated some ten action points for bringing aboutimprovements in customer service. Some of theimportant ones relate to banks notifying the MostImportant Terms and Conditions (MITC) for depositas well as loan products; (the terms and conditionspresently available are numerous and are rarely, ifever, read by any bank customer. The MITC are requiredto be not more than a page and should include thoseterms / conditions which indicate the obligations imposedupon the customer and which may affect the customeradversely); providing insurance for a reasonable amountto cover loss of credit / debit card, providing periodicloan account statements, despatching Tax Deductionat Source (TDS) Certificates to each customer etc. aresome of the other action points for banks.The RBI has also stepped out of its crease in reachingout to the bank customer by organising Town HallEvents with existing and potential bank customers,which are televised. The Bank also conducts Outreachprogrammes so as to cover existing and potential bankcustomers in small towns and villages. It may surpriseone to know that recently one such Outreach Programmewas conducted at an unbanked village, having apopulation of about 3000, situated about 16 kms. fromthe district Head Quarters in Aantnag in the KashmirValley. The nearest bank branch is at a distance of5 kms. from this village. It is for banks to follow throughon these initiatives of the RBI and convert this intotheir customer base.Steps are being taken to continuously not onlyattend to basic customer needs but also the specialneeds of disadvantaged groups such as pensioners,small borrowers etc. and the changing face of customerservice as highlighted above is a testimony of thisconcern. While the degree of efficiency in renderingcustomer service may vary from bank to bank, therecan be no denying that there has been a paradigmshift. No doubt, the BCSBI will continue to exerciseits role of a watchdog and ensure that complianceby banks does not slip. BCSBI is also taking stepsto generate greater awareness among bankersabout their commitments, and customers about theirrights, as enshrined in the two Codes referred toearlier; but as the old adage goes - you can takea horse to the water but you can't make it drink. Forthis, you require either a change of mind-set or greateraccountability.16October - December 2011The Journal of Indian Institute of Banking & Finance

special featureBest Practices in Customer Service inIndian Banks : An Economist's PerspectiveM. R. Das *Customer service is a perennial topic for discussionfor the service sector in general and banking inparticular. For the metaphorically oriented, this reflectsthe perennial desire on the part of customers to aspirefor better and even better services always. Banks,being financial intermediaries, are “special” and so istheir customer service. Bank failures can precipitatein economic catastrophes as recently demonstratedby the crisis which is everyday taking a new turn.Therefore banks have to always remain alert to theneeds of its customers be they depositors, borrowersor service seekers.Best practices in customer service in banks cannotbe static. They exhibit inter-temporal and inter-spatialdynamism. What is best today may not remain besttomorrow and what is best in one place may not be thebest at another place. However, there are some bestpractices which remain eternally the best. Therefore,banks should always try to better the best. That is whywe wake up from time to time to search for thesebetter than the best practices. For example, what wasconsidered the best by Goiporia Committee in 1990 is nolonger considered the best today and therefore we hadDamodaran Committee on customer service in banks(2011). The entire banking landscape has undergone acomplete metamorphosis over the intervening period. Asthe saying goes, change is the only constant.Customer service becomes crucial in an industry wherethere is no or very little product differentiation. In today'sworld, where scientists have successfully cloned animalsand aim at even cloning human beings, product or servicecloning is a mere sleight of hands. The banking worldis full of such examples where products and servicesushered in by a bank have been copied within no time tooffer similar products or services. In such a scenario,customer service can really make a big difference.Customer service enhances the nation's income byfacilitating the sale of goods and services. Peopleengaged in rendering customer service in an industryare the people who make the ultimate activity of saleof products / services a reality.Customer service is not the monopoly of only bigindustries / services. Even a small economic factor cangive better service than their bigger counterparts.I would strive to make this paper not 'yet another' onebut a bit avant garde - you may call it an economist'sperspective. This essay is structured as follows :Section - 1 : conceptualizes what all comprise “bestpractice”;Section - 2 : depicts how good customer service can helpachieve better financial inclusion;Section - 3 : outlines the 'internal' customer service inbanks; andSection - 4 : concludes.Section - 1Conceptualizing Best PracticesWhat is meant by “Best Practices”? Is there a manualor handbook which defines “Best Practices in customerservice”? Probably not. One may recall here theexhaustive list of recommendations contained inthe RBI-appointed Goiporia Committee (1990) or thelatest Damodaran Committee (again RBI-appointed)on customer service in banks. It has to be definedin the context of each and every commodity or service,by setting certain standards for various parametersassociated with the product or service. A list of such bestpractices is enunciated below.* AGM (Economist), State Bank Staff College, Hyderabad.The Journal of Indian Institute of Banking & Finance October - December 2011 17

special featureTimelinessThere is an old saying that “time and tide waits for none”!This is particularly true in today's setting when everybodywants every thing at the so-called “lightening speed”.Bank customers are no different. Therefore, any bestpractice should, first and foremost, specify the time limitsfor its various services (if not all, for the basic bankingservices) and monitor regularly that the norms areadhered to by the ultimate service providers.Explaining Terms and ConditionsThe second most important requirement is that whetherthe service providers explain the terms and conditions(including the so-called “fine prints”) to the customersbefore rendering the required services. Gone are thedays when banking used to be a sellers' market; it is abuyers' market today. Moreover, since our country hasoperationalized the Right to Information Act, customershave the rights to ask the bankers the intricacies of termsand conditions before availing of a product or service.Cases of unhappy customers abound in credit cardsegment because of the 'communication gap' betweencredit card companies and credit card holders. Housingloan is yet another case in point.Exuding TrustBanking means trust. Against this backdrop, thebanker should behave with the customer in such away that he exudes confidence and trust in the mindof the latter. The bank personnel must be trainedin Behavioural Science/s, particularly in soft skills andbusiness etiquette. It should appear that one is the wholeand sole provider of solutions to the eager customer whois sitting in front of him. A decade or two back these didnot matter, but today they do.Exclusive AttentionNext item in the “best practices” is paying exclusiveattention to one's customer. Today, everybody lovesexclusivity. One should not go away or indulge inconversation with fellow colleagues in the middle of atransaction with the customer. One should pay undividedattention to his customer. One should generate a feelingthat he is there because the customer is with him. Oneshould call the waiting customers one by one and shouldnot allow a congregation around his desk. Moreover,since the time at one's disposal is limited, he candifferentiate the customers according to their needs andattend to them at various times and in various ways. Forinstance, some customers may not be willing to come tothe branch, for them one can arrange home banking,tele-banking, etc. Some may be willing to come to thebranch, but not stand in the queue to withdraw money, forthem one can have, drop boxes, ATMs, etc.Use of ComputerToday's workers have been usurped by computers.The general feeling among the customers is that a manmay be incorrect, but a computer cannot be. Therefore,one must be tech-savvy and while transacting businesswith the customer should preferably be telling himthe required details from a computer. Today's customertrusts the computer more than the banker. One shouldalways be in a position to give computerized statementsof accounts, documents, etc.OmbudsmanThere should be adequate mechanisms for redressalof grievances quickly at bank level and beyond. BankingOmbudsman is a part and parcel of our financialarchitecture. Looking at the exponential trend inwhich banking population especially in urban / metroareas is growing, the number of Ombudsmen in thecountry should be reviewed from time to time.Moreover, Banking Ombudsmen should not be yetanother place for parking retired government or bankservants; it should be a position for rather young,agile persons who can take decisions quickly withoutbureaucratic hassles.Banking Codes and StandardsHaving a code of conduct for banking services isa very essential requirement for any world classcustomer service. In our country, the Banking Codesand Standards Board of India is not only meant forretail customers but also small and medium enterprises.This signifies that we are having world class standards.Motivating Customers to use Technology ProductsAs far as customer service is concerned, bankersshould be extroverts. They should go out to disseminate18October - December 2011The Journal of Indian Institute of Banking & Finance

special featureinformation as to new products and services tocustomers as also the public at large. Banks should'invest' in Customer Relationship Management (CRM).Since technology is the pivot around which today'sworld of banking revolves, bankers should marketmore of technological products. The brick and mortarmodel is passé. The bankers should motivate people touse increasingly internet banking, ATM, phone banking,mobile banking, e-commerce, RTGS, EFT, CMP, etc.This will reduce the cost of transaction for banks andsolve many unwarranted problems of customers too. Itshould be pursued as a mission.Customer FeedbackThis should be an integral part of CRM. We cannotwalk unless we know where we stumble! Regularcustomer feedback should be collected eitherthrough e-mail, paper questionnaires, or by just talkingto customers. The inquiries should remain short butworthy of producing impact. However, the sad thingin our country is that neither customers nor bankersare serious about such surveys. These surveysshould be conducted at local levels since India is avast and varied country and can be outsourced toreliable consultancy agencies.Section 2Customer Service and Financial InclusionInclusive growth is the mantra today which is beingfollowed all over the world with the objective ofpartnering the poor in the formal financial developmentor growth process of the economies. Whether a bankis small or large, it has to implement the policy in amanner suitable to its specific conditions. The goal ofeconomic development is economic uplift of thoseat the “bottom of the pyramid”. The same applies tofinancial development. It is, therefore, important thatvarious agencies in the financial markets, particularlybanks and insurance companies willingly and happilyinnovate, design and deliver suitable products andservices to the large mass of people at lower rungsof the society. A public policy that eschews this'percolation' is meaningless.Over decades, banks, particularly the public sectorbanks have done their best, but they are yet tomake a significant dent in the arena of financial1inclusion, as some statistics reveal : Out of the 600,000habitations in the country, only about 30,000 havea commercial bank branch. Just about 40% of thepopulation across the country has bank accounts,and this ratio is much lower in the north-east of thecountry. The proportion of people having any kindof life insurance cover is as low as 10% and proportionhaving non-life insurance is abysmally low (0.6%).People having debit cards comprise only 13% andthose having credit cards only a marginal 2%. TheNational Sample Survey data reveal that, in 2003,out of the 89.3 million farmer households, 51% did notseek credit from either institutional or non-institutionalsources of any kind. Even where bank accountsare claimed to have been opened, verification hasshown that these accounts are dormant. Few conductany banking transactions and even fewer receive anycredit.In furthering financial inclusion, customer serviceto the financially excluded is more vital and arduousthan to the financially included. Banks will have todepend upon, to a very great extent, on the localpeople who understand the rural economy, ruralpsychology, rural dialect and rural people. Bankershave to “co-create” confidence among the financiallyexcluded that banks are there to become theirfriends in both sunny and rainy days. They will nottake away the umbrella when it rains - the old adagehas changed! Once this confidence is settled forcertain in the minds and hearts of the financiallyexcluded, it would be a smooth sail thereafter.Technology will play a critical role in renderingbanking services to the financially excluded andreduce operational cost. Kiosks, Mobiles, ATMs andPoS will be the daily devices. The implementationof BC / BF model has to run at a galloping speed thanwhat it is today.Another related aspect is promoting financial literacyamong and credit counselling to the financially excluded.1. Subbarao, Duvvuri,”Financial Inclusion: Challenges and Opportunities”, RBI Monthly Bulletin, January 2010, pp.3 (Web Edition).The Journal of Indian Institute of Banking & Finance October - December 2011 19

special featureRBI has taken it up as a mission. It has also exhortedall banks to follow it with missionary zeal. More oftenthan not one hears horror stories about farmers,weavers, etc., committing suicides because they couldnot repay their dues owed to the village moneylenderor bank. This happens because these uninitiated peopledo not know how to do financial planning, restructureloans, spread the dues over more time, etc. Thereis no expert to counsel them at times of financial andpsychological crises. Even for the financially learnedpeople, financial counselling is required particularlyat the times of crises like the recent Great Recession,which has had terrible psychological impact on manyof them. Bankers' teams in this regard should includeprofessional counsellors too.There is no escape from modern technology whenit comes to financial inclusion. As in 1994-95, whenthe first set of new private sector banks were licensedby RBI, now also the latter will insist that the privatesector entering into banking must do so armed with thelatest technology.Secondly, the prospective banks may not be interestedin furthering financial inclusion by establishing brickand mortar or even 'tin shed' branches. Rather, in abid to keep their transaction cost as low as possible,they would look for collaboration or strategic allianceswith banks and post offices, which have alreadymade significant progress in financial inclusion in theirareas of operation. They would also try to rope inBanking Correspondents and Banking Facilitators, theappointment norms for whom have been progressivelyrelaxed over a time by RBI.Thus, it is felt that an atmosphere of 'competition' incustomer service to the financially excluded may notprove fruitful; rather an atmosphere of 'collaboration'between the two groups of banks will be more 'resourceoptimizing'and 'result-oriented'.Section - 3Internal Customer ServiceBesides banks' external customers, what are thebankers doing about their 'internal' customers (fellowcolleagues) is an interesting point to examine here.Is anyone being served, in desirable fashions, byone's fellow colleagues in various areas, startingfrom maintaining staff accounts to enriching theirknowledge through HR efforts or by taking care of theirpromotions / postings according to their abilities andchoice of place, etc? This is a grey area where alot remains to be done. Nobody can deny that thereis a symbiotic relationship between 'external' customerservice and 'internal' customer service. Unless bankersthemselves are happy they cannot render world classservice to their external customers. If we cannot sayeffortlessly and proudly that it is 'My Bank', then customerservice will not be our forte.Section - 4ConclusionAs argued in the beginning, products and servicesare easily cloned in commodities and servicesspheres. Therefore, a bank can differentiate itselffrom its competitors only through its customer service.And, this should not be the job of the ultimate serviceprovider at the front desk alone; this should includeall - right from the Board, Chairman and TopManagement down to the senior, middle and juniormanagement, award staff and sub-staff. Inclusivecustomer service should be the new normal.20October - December 2011The Journal of Indian Institute of Banking & Finance

special featureCustomer Service in Banks - Best PracticesS. N. Sharma *L. P. Padhy **The banking system is an integral part of the financialsector of the economy. The financial sector playsa major role in the mobilization and allocation ofsavings. Banking being a major subset of the financialsector is based on the intermediation process - transferof financial resources from net savers to net borrowers.Banking system is repository of customer confidence.Hence, a qualitative customer service is a pre-requisitefor developing a vibrant banking system.Evalution of Banking System in IndiaBanking in India has a long history and it has evolvedover the years passing through various phases. Theperiod leading up to independence was a difficult periodfor Indian Banks. With a view to aligning the bankingsystem to the needs of planning and economic policy, thepolicy of social control over the banking sector wasadopted in 1967, which marked the beginning of theepoch- making phase. The Indian Banking has come athlong way since 19 July 1969 when major banks werenationalized with the objective of channelizing the savingsof the masses into productive and needy sectors ofthe economy. The post-nationalization period can beseen falling into three distinct phases. Phase - I - spanningfor about 15 years from 1969 was marked by rapidbranch expansion and social banking initiatives. A totalcontrol on interest rates ensured a decent spread forbanks. Phase - II : which lasted for next 10 years broughtprofitability, productivity and efficiency of Public SectorBanks (PSBs) into sharper focus and Phase - III -commenced with the implementation of NarasimhamCommittee recommendations in 1993-94. The last 10years of this post-reforms phase can be said to be themost eventful and successful because the industry notonly recorded a healthy all round growth during this periodbut also proved its resilience against the worst financialcrisis faced by major banks in the developed world.Performance of Banking SystemThe quantitative expansion in banking business afternationalization has not witnessed a matching qualitativeimprovement in bank's services. There was downwardtrend in the quality of service and efficiency of banks.Since banks are the most essential part of the economy,their inefficiency will adversely affect economic growth.All these necessitated the review of the role of bankswhich has become all the more important consequentupon financial and banking sector reforms. The objectiveof the reform process has been to make the bankingsystem more viable, competitive, vibrant, productive,efficient, profitable, and technologically competitive andcustomer friendly. In short, it aimed to integrate Indianbanking with global banking.Today with 167 banks, 89000 bank branches, averagepopulation of 15000 per branch, Indian banking industrystands tall on the landscape of Indian financial systemplaying two key roles viz. financial intermediation and anefficient medium financial payments and settlements.The dominance of PSBs has come down from 87% in1980 to 76% in 2010-11 in terms of their market share intotal business.As against this, the share of the private sector banks hasshot up from 5% in 1980 to 18% in 2010-11.Needless tomention, a lion's share of this 18% has gone to the newgeneration private sector banks. The balance of 6% goesto the foreign banks.* Principal & Deputy General Manager, Bank of Baroda, Staff College, Ahmedabad.** Chief Manager (Training), Bank of Baroda, Staff College, Ahmedabad.The Journal of Indian Institute of Banking & Finance October - December 2011 21

special featureSignificance of Customer Service in BanksCustomer Services has great significance in the bankingindustry. The banking system in India today has perhapsthe largest outreach for delivery of financial services andis also serving as an important conduit of financialintermediation. While the coverage has been expandingday by day, the quality and content of dispensation ofcustomer service also have been getting aligned to theexpectations of the customers.The vast network of branches spread over the entirecountry with millions of customers, a complex varietyof products and services offered, the varied institutionalframework - all these add to the enormity and complexity ofbanking operations in India giving umpteen opportunitiesto banks to make constant improvement in the services.Any initiative for betterment of service needs a thoroughunderstanding of the customer perceptions, their needsand changing aptitude of consumers. Such efforts ofbanks are evidenced by a series of studies conductedby various committees such as the Talwar Committee,Goiporia Committee, Tarapore Committee, etc. to bring inimprovement in performance and procedure involved inthe delivery of hassle-free improved customer service.In the whole process of improving customer service,the efforts of banks were adequately supplementedby the Reserve Bank, as the regulator of the bankingsector. It has been actively guiding, supporting andis actively engaged from the very beginning in thereview, examination and evaluation of customer servicein banks. It has constantly brought into sharp focus theneed for quality and introduced framework to ensure thatbanking services are available to common people.It also stressed the need to benchmark the current levelof service, review the progress periodically, enhance thetimeliness and quality, rationalize the processes bytaking into account technological developments andsuggest appropriate incentives to facilitate change on anongoing basis through its directives.Thus, the role of Reserve Bank of India has been criticalcatalyst in improving customer service in banks. Thus,depositors' interest forms the focal point in evolvingpolicies for better customer service in Banks.Impact of Competition on Customer Service in BanksWe have seen that reforms in the banking sectorover the last eighteen years have gradually heightenedcompetition in banks. Improvement in the quality ofcustomer service received top most priority and emergedas the key business differentiator to compete. Rightfrom customization of products to suit the customerappetite, expansion of range of products / services, wideruse of technology to make banking more accessible atcustomer's call, right up to the minute customer needshave received bank's attention. The rigorous homeworkof banks to improve the face of banking is visible in thebank branches. The transformation in the approach andattitude of the employees towards customers is evident.PSBs too, fast changed their service delivery model /style to compete with their private peers.Factors influencing the Customer ServiceHuman ResourcesAny organization's success or failure is the result ofsuccess or failure of its employees collectively. Here theemployee doesn't mean only the staff working down theladder, but also includes people right up to the top.Humans may be assisted by the technology for arriving atthe decisions.Products / ServicesThe products which a bank offers are mostly financialproducts like deposits, advances and along with theseproducts also provide other services which are not financialin nature, like safe deposit vaults, locker facilities etc.The flexibility of banks to adopt changing needs andexpectation of customers and bring out products / servicesto suit customers is an important area in banking services.ProcessesThe processes devised for getting the services should bevery customer friendly, easy to understand and complete.Delivery channelsCustomer satisfaction is also dependent upon the deliverychannels used by banks in providing the services. Today'scustomer wants effortless, efficient, secure, simple anddependable channels of delivery, whether it is throughhumans or technology driven channels.22October - December 2011The Journal of Indian Institute of Banking & Finance

Customer feedback and complaintsFeedback from customers is of immense help informulating products, fine tune services and plug theloopholes. Each complaint of the customer should beproperly analyzed, assessed.Grievances Redressal MechanismImproving upon the services is an ongoing process.An organization which has robust mechanism toredress the complaints and resolve problem of thecustomer gets recognition as a customer friendlyorganization.Market StudiesMarket studies are effective tools to study thebehavior of customers and their response to presentstandard of services. It also helps to understandfuture trends and requirements as needs of thecustomer's keeps on changing with change of times.Market research gives way to innovations in productsand services. Market studies may be done in-house,or assigned to outside expert agencies or bothdepending upon the vision of the bank.Institutional Initiatives for Better Customer ServiceSystemsAt the instance of the Reserve Bank of India, bankshave set up internal customer grievances redressalmechanism at branches and controlling offices. A fourfoldstructure is put in place in banks. Board levelCustomer Service Committee for policy formulation,standing committee to review customer service, nodaldepartment / nodal officer for liaisoning with variousauthorities, the bank and branch level customercommittees. The revised Banking Ombudsman Scheme2006 has been made more customer friendly byincreasing the areas covered under the scheme.It now entertains e-mail complaints and providesfor an appeal against the decision of Ombudsman.In 2003, Reserve Bank of India had issued the FairPractices Code for Lenders, which required banksand FIs to provide a copy of loan agreement. Customerscan also sign in for national 'Do Not Call Registry'to avoid unsolicited phone calls from banks / salesoutfits.special featureBanking Codes and Standards Board of India (BCSBI)has been set up in 2006 to promote good bankingpractices by setting up minimum standards, increasingtransparency, achieving higher operating standardsand promoting cordial bank customer relationship.Most member banks of BCSBI are committed toprovide information about interest rates, fees andcharges applicable to various products.Specific time frame is fixed for disposal of loanapplications and disbursal of loan proceeds, grantingcollateral free loans wherever the schemes providefor. It lays down policy of banks for collection ofdues / cheques, compensation and grievance redressal.A separate department of Customer Service is set upin Reserve Bank of India to oversee the complianceof standards set by it.Advantages of Technology in Improving BankingServicesOverall, technological innovation has brought aboutspeedy processing and transmission of information,easy marketing of banking products, enhancementof customer access and awareness, wider networkingand, regional and global links on an unprecedentedscale. Most banks make visible efforts to keep upwith new systems and processes and thus deliverimproved services to customers.Increased use of technology led to delivery of neatand accurate banking service to the customers.Computerized passbook printing, statement ofaccounts, auto printing of standard letters to customers,quick access to information on personal computersprovided a huge value and satisfaction to thecustomers who were struggling to read differenthandwritings of bank employees manning the counters.Though technology was introduced as a customerconvenience tool, it began to become a cost cuttingtool by transforming human intensive banking totechnology intensive banking.Thus, taking the help of technology, banks are fastmoving from 'brick and mortar' banking to virtualbanking though physical presence is going to stayin India due to the unique nature of Indian bankingThe Journal of Indian Institute of Banking & Finance October - December 2011 23

special featureand varied Indian democratic structures. Personaltouch and relationship management in banks in Indiacontinues to hold significance as a value propositionto customers despite the massive automation of bankingservices.Financial Inclusion- a viable business propositionfor banksDespite the massive expansion of banking system,majority of people still bank on indigenous moneylendersin villages leading to a low financial inclusion ratio.More inclusive growth leads to improvement in theeconomy and pooling financial resources in the formof savings of large number of people strengthensbank's capability to lend more. Banks need to quicklymove towards universal financial inclusion. This isboth a national commitment as well as a publicpolicy priority. In order to achieve the ultimateobjective of reaching banking services to all the sixlakh villages, financial inclusion has to become a viablebusiness proposition for the banks.Rising Customer ExpectationWhile banks are moving towards attaining higherstandards of customer service, the customer needstoo are increasing because of globalizing environment.As a result, banks have to chase moving target inmeeting customer aspirations. While the technologybrings sophistication and speed, the element of humanrelationship holds more value in strengthening businessties. PSBs provide the much needed personal serviceto customers respecting the age and profile ofcustomers. Banks are gearing up to provide a suitableservice environment to different class of customers.Setting up of specialized branches is a step to meetcustomer expectations.Challenges for banks in integrating ITMaking customers comfortable in using technologybased products and services will be a challengeto educate customers to shift transactions frommanual mode to technology mode to enable optimumuse of IT infrastructure. Unless customers extensivelyuse technology platform, there is absolutely no pay backfor banks.In the environment of subdued usage, banks will notbe encouraged to bring further improved technology.Since technology suffers from fast obsolescence,replacement has to be fast and hence pay back isessential. Those using technology centric services inbanks should become partners in spreading educationon usage of electronic banking.IT Centric Customer ServiceThe future of banks will belong to tech-savvy bankersas well as users. Information technologies and theinnovations are strategic tools for enhancing thevalue of customer relationship. They reduce the costof financial transactions, improve the allocation offinancial resources and increase the competitivenessand efficiency of financial institutions. Even as theachievements of IT in the banking sector areimpressive, banks have a big agenda on the wayforward.Customer - centric ModelBanks need to adopt more customer-centric modelsof growth and service. Technology is not an end,but means of business and it must help reduceintermediation costs. Availability of financial services /products, at affordable prices on an uninterruptedbasis is the purpose and result of financial sectorstability.Efforts to Improve Customer Service at BranchesBanks should be focused towards providingexcellent customer service through all deliverychannels and has been making continuous effortsfor enhancing the level of customers' satisfaction byleveraging technology to provide e-products andalternative delivery channels best suited to thediverse needs of different customers. The variedinterests and expectations of customers are takencare of by improving upon the various processes andprocedures.To eradicate customer complaints fully and ensurehassle free customer service, analysis is done onthe complaints received from the customers andsuitable timely action is taken so that there is norepetition of such complaints in future. Every bank24October - December 2011The Journal of Indian Institute of Banking & Finance

should have board approved policies on customerservices and the same are placed on its website.Suggested best practices for enhanced CustomerServiceOnline channels should always be kept functionalto achieve excellence. Channels of delivery ofcustomer service need to be well organized,properly maintained and closely monitored toensure customer delight.●Professional sales management are the mostimportant lever to enhance customer service. Bankshave to undertake a detailed study, in a practicalbranch context, to fine-tune their role definitionsand to further business-process re-engineering toincrease the available time for sales and servicein branches. In this context, empowering branchmanager leads to significant improvement in branchproductivity and customer service. Redesign of theBranch for the Next Generation thereby more spacehas to be allocated to customers, process need to bere-designed to reduce turn around time (TAT).●Best practice sales process requires that in the firstfew months the customer is signed up and trainedto use all alternate channels including internet, billpay, Point of Sale (POS) payments, ATMs, and otherconvenient and associated offerings.●This apart, simplicity of product portfolio makesthe sales process more efficient and branch staffmore productive. PSBs have to develop offeringsfor their wealth management advisory services fortheir customers, so that customer attrition can bearrested.●Attaining overhead efficiency by better decisionmaking may lead to more intense customer focusthroughout the organization. Even senior businessleaders may come closer to customers which holdparamount significance in customer-centricity inbanks.●Banks need to create lean processes throughcustomer-centric Business Process Re-engineering(BPR). Along with this, organization restructuring is●called for in order to align operating models to thebusiness imperatives. PSBs need to adopt a newstrategy for IT investments beyond Core Bankingsystem (CBS); so that needs can be customized tobusiness units.Customer Relationship Management (CRM) in theIndian banking system is fundamental to buildinga customer-centric organization. CRM systems linkcustomer data into a single and logical customerrepository. Banks can turn customer relationshipinto a key competitive advantage through strategicdevelopment across a broad spectrum. Efficientcustomer service and customer satisfaction shouldbe the primary objectives of the banks in its day today operations. Banks should be highly responsiveto the needs and satisfaction of its customers, andcommitted to the belief that all technology, processes,products and skills of its people must be leveragedfor delivering superior banking experience to theircustomers without fail.●Benchmarking Parameters : Disclosure about chargesand interest rates in terms of codes of commitment tocustomers under BCSBI, pro-active communicationabout new products and services, demonstratingand justifying trustworthiness before customersat all points of time, effective complaint resolutionsystem, convenient banking hours, professionalismof banks, well trained, courteous and friendly staff,faster service at branches, efficient processes,effective communication on developments, innovationin banks, no hard- selling of products that customers donot want- all these parameters should be ingrained inthe best practices of banks.●We need new generation banks to deal with newgeneration banking. The Next Generation Bankingis going to be full of business opportunities interms of volumes but tough on margins due to fiercecompetition. Gen Next Banks will have to providebasic banking services to their customers with speedand efficiency which is a minimum must. What willdifferentiate a winner from others will be the valuecreation for the customer.●special featureThe Journal of Indian Institute of Banking & Finance October - December 2011 25

special featureConclusionBanking has undergone change. So has the customerchanged. The customer of today is not what he wasyesterday. Today the customer is more knowledgeable,demanding, analytical and aware of his rights. It istherefore a challenging task before the banking sectorto revisit their entire working modules, upgradation ofskills, technology, and policies so that they are competentto withstand the international competitive environmentin future. Customer satisfaction is an integral elementin inculcating trust among the common people on thebanking sector. Therefore, it is imperative that people,process and technology must be appropriately integratedtogether to satisfy the business and customer needs.References1. Inaugural address by Smt. Usha Thorat, Ex-Deputy Governor,RBI on “Establishing consumer Centric Financial ServicesDelivery Infrastructure.”2. Special Address by Dr. K. C. Chakrabarty, Deputy Governor,RBI at BANCON 2011 on “Gearing up for the CompetitiveImpulse in the Indian Banking in its defining Decade”.3. Shroff Memorial Lecture delivered by Dr. Subir Gokarn, DeputyGovernor, RBI on “Growth, Resilience and Reform : Reflectionson Post-crisis Policy Challenges”.4. Vinimaya, October-December, 2009.5. RBI Trends and Progress- 2010-2011.6. Indian Banking : Towards Best Global Practices by Mc Kinsey &Company.7. Building and providing world class customer care By BillSumerlin and Phil Hodson.8. Being Five Star in Productivity - Roadmap for Excellence inIndian Banking by BCG, IBA & FICCI.9. Joint study conducted by Outlook Money and TNSReport of the Committee on Customer Service in Banks10.Key Note Address by Shri R. K. Bakshi, Executive Director ofBank of Baroda in Annual Banking Conference held at NMIMSCampus.The Reserve Bank constituted a Committee (through a Board Memorandum dated May 26, 2010) under the chairmanship ofShri M. Damodaran, former Chairman, SEBI to examine banking services rendered to retail and small customers, includingpensioners. The Committee also had a mandate to look into the grievance redressal mechanism prevalent in banks, its structureand efficacy, and suggest measures for expeditious resolution of complaints.The Committee had interactions with various stakeholders on all aspects of customer service fair treatment, improvement inservices to pensioners, attitude of the bank staff towards the small and rural customers, service charges and fees, transparencyin operations, grievance redressal, promptness in service, education and information on new products, and customer rights andexpectations, among others. The Committee also called for public suggestions.The Committee submitted its report to the Bank in July 2011. According to the Committee, the major expectations of consumersare that banks should : (i) have a customer-centric approach; (ii) render fair and non-exploitative treatment and adhere to fulldisclosure of information; (iii) put in place an expeditious grievance redressal; (iv) provide a simple deposit account instead ofsuo moto offering bouquet services without customer demand and charging for the same.The recommendations of the Committee are based on the above customers expectations. They include inter alia : (i) creationof a toll free Common Bank Call Number; (ii) providing plain vanilla savings account without prescription of minimum balance;(iii) setting up of a trusted third party KYC data bank, which can be relied upon for KYC purposes; (iv) providing small remittancesat reasonable price; (v) zero liability against loss in ATM and online transactions; (vi) enhancement of Deposit Insurance andCredit Guarantee Corporation (DICGC) cover to `5,00,000.Source : Report on Trend & Progress of banking in India, 2010-11, RBI26October - December 2011The Journal of Indian Institute of Banking & Finance

special featureCustomer Service - Best practicesL. Srinivasan *Banking - The Paradigm shiftThe banking sector has undergone an incrediblemetamorphosis in the last few decades. Heavy ledgers,registers and balance-books have been replaced bysleek, state-of-the art computers. Bankers no longerhave to do manual accounting, reconciling, tallying,writing the day-book or preparing the weekly balancesheets. It has been a long and exciting journey from themonotonous brick-and-mortar banking to the presentdayAnywhere and Any Time Banking. Customers todayare not necessarily the customers of a branch; they arecustomers of a bank !The transformation is seen in all facets of banking.The deposit and loan products of the olden dayswere handful and simple. Now banks offer complexproducts, using mind-boggling terminology! - To namea few : flexible savings bank accounts with sweep-inand sweep-out facilities, un-fixed (!) fixed deposits,teaser home loans, floating rates, channel financing.All transactions are system-generated and customersas well as bankers bank heavily on computers.Road-map for virtual banking- the other side ofthe story :From the present-day Core Banking Solutions(CBS) environment, banking sector is moving, inall seriousness, towards Virtual Banking. Withtechnology-enabled products such as internet banking,mobile banking, ATM-cum-debit cards, credit cards,Smart-cards, PoS machines and Overseas Travel cards,banks offer sophisticated services to customers.In the race towards virtual banking environment,Banks should appreciate the multi-faceted dimensionsof Indian economy and the unique requirements ofIndian customers. It will be a win-win situation bothfor the bankers and the customers, if computers areused only as tools to serve the customers faster. Indianbanks may move towards a new-age banking butthey should retain the core values that have all alonginspired them. Let us discuss specific issues. :Talk to customers :Customers, especially Indian customers, want totalk; and they want the bankers to listen to them.They belong to different economic and social strataof society. Their literacy and communication levelsare different. It will be good for bankers to understandand appreciate the sharp variations among theircustomers. Banks have different types of customers -besides high-profile modern-age customers, theyserve pensioners, women, illiterate customers andsocially marginalized people. Banks must exhibitsympathy and empathy towards them and shouldfine-tune themselves to understand the needs ofthese customers.The physiological, psychological and the financialneeds of customers :Customers have all types of needs. If they wantto come to a brick and mortar branch, they mustbe welcome there. Their physical needs such asa good ambience, water and seating arrangement,must be met. More important are their psychologicalneeds - a warm smile, attention, understanding andassurance.Smile at the customers :A computer does not smile. Only a banker can smileat the customers. Customers want the bankers tosmile sincerely and not give them a dry, hesitant or* Senior Manager, Indian Overseas Bank Staff Training College (IOBSTC).The Journal of Indian Institute of Banking & Finance October - December 2011 27

special featurebusiness-like smile. Bankers will do well to wear awarm smile as part of their dress-code. Customerswant to be listened to, understood and empathizedby the bankers. If they are taken care of, they will,in turn, take care of the business of the banks!Their problems are important for them, though theymay appear insignificant to the banker. The bankershould respond to the customers' issues and providecomfort.Dissemination of financial literacy and productfeatures :Customers do not want jargons or high-profileterminology. They want to understand the bankingproducts and services in a simple way. The bankersshould illustrate, for example, what is a fixed depositand what is a re-investment deposit, what isthe mechanism of Equated Monthly Instalment(EMI), what is the difference between flat rate andinterest rate on monthly reducing balance, what arethe implications of a loan product quoted in floatinginterest rates. The customers also need to be toldabout the products which are suitable for them.SME borrowers need to be told patiently about thevarious facilities offered by different agencies fortheir uplift. Most of the borrowers require financialliteracy rather than finance per se. Bankers have avital role to play as financial advisors to thecustomers. Banks also need to retain their existingcustomers; when new customer-base is createdwith the technology, there should not be a drain of theexisting customer-base.Banks and Corporate Social Responsibility (CSR) :National level initiatives such as Financial Inclusionand Government sponsored loan schemes for ruraland urban poor to uplift people {living below thePoverty Line (BPL)} above the Poverty Line, cansucceed with the pro-active participation of banks.Similarly, the country can witness a second Greenrevolution when agriculture and allied activities arefinanced by banks. Borrowers engaged in agricultureand allied activities and the SME sector, need constantcounseling. They need bankers to act as a bridgebetween them and the other nodal agencies. Banks alsoneed to leverage the core-competencies of variousagencies-Government and non-government, to reachand teach the poor and the downtrodden.Conclusion :New-age banking is welcome if it can be complementedand supplemented by the core-customer servicevalues that will impact all segments of the society.Technology should not distance the banker fromthe customer. On the other hand, technology andhuman values should go hand in hand and work intandem. In that scenario, the banks will contributetheir best towards nation's growth.Recommendations of the Working Group on Securing Card Present TransactionsA Working Group was constituted by the Reserve Bank on March 31, 2011 for recommending measures to secure all CardPresent (CP) transactions. The Group, which submitted its report on May 31, 2011, made inter alia the following recommendations :(a) The technology and payment infrastructure like implementation of Unique Key Per Terminal (UKPT) and Terminal LineEncryption (TLE) should be strengthened within 18-24 months; (b) An additional factor (Personal Identification Number (PIN) orBiometric) for all domestic debit card transactions should be introduced within 24 months; (c) After monitoring the progress madein the roll-out of Aadhaar UID, it may be considered to use the biometric finger-print capture in lieu of PIN at the ATM and PoSfor 18 months; (d) Based on the above recommendations, a decision should be taken to introduce Euro pay Master Card Visa(EMV) Chip and PIN for credit cards and debit cards for all domestic transactions within five and seven years, respectively; (e) EMVChip Card and PIN should be issued in lieu of Magstripe cards when at least one purchase is evidenced at an overseas location.The Report was placed on the RBI website for public comments. The recommendations of the Group have been accepted by theBank and appropriate directions have been issued in September 2011.Source : Report on Trend & Progress of banking in India, 2010-11, RBI28October - December 2011The Journal of Indian Institute of Banking & Finance

special featureCustomer service - best practicesin Union Bank of IndiaV. L. Vaidya *M. K. Nanda **“The Customer is not king any more, he is the dictator”- Fortune MagazineAll the resources of service organizations inparticular are focused on one goal that is customerservice in the present socio economic environmentprevailing across the globe. Union Bank of Indiahas made its presence highly perceptible in thepublic at large because of customer centricity cultureadoption with a good homogeneous geographicalpresence across the country with over 3170 branchesand over 2900 ATMs. Thus the visibility of theinstitution has improved because of this pan Indiapresence.The real beginningThe word customer service was best contemplatedand was drawn into an action plan for implementationby Union Bank of India in the year 2007 througha project called NavNirman, a business process reengineeringexercise which included rebrandingexercise that is to take on the changing demographicadvantage for connecting with the youth of India, whoare a major chunk of working class contributing toaggregate demand in the economy.During the year 2007 to 2010 the projectimplementation included product innovation formeeting value for money, which is one of the brandpromises to the customers of the bank apart fromprocess improvements like creating back office andcreation of various alternate delivery channels forfreeing the branch for attending to customerseffectively, which is also one of the pillars of there-engineering process.On people front, a country wide initiative was takento train all the frontline officers for enhancing thesoft skills for improved customer satisfaction. Duringthe same period a major training programme wasconducted country wide for the then PTS (Part timesweepers) now re-designated as (full time) housekeepersto maintain cleanliness of the premisesapart from etiquettes and attitudinal shift towardscustomers which is highly experienced across thebranches.Today for meeting the retail and SME creditrequirement, bank has set up Union Loan Points andBusiness Banking branches functioning under retailand SME vertical head of corporate office which serveas unique customer touch points for lower turnaroundtime. (TAT)Creating superior customer experiencesOn transparency front, the bank has uploaded acustomer grievance redressal policy, compensationpolicy apart from code of commitment to customers andSME code of commitment. Online grievances receivedfrom customers are redressed efficiently through asystem support of escalation matrix from branch tothe corporate office without leaving a scope fordillydallying. The branches display the address ofombudsman, address of the BCSBI code complianceofficer apart from physical complaints register. Apartfrom monthly customer meet as per RBI directives,the bank also conducts all India customer servicemeetings every quarter across all branches underthe guidance of central office. The prime objectivesof such meetings are to find out customer service* Vice Principal, Staff College, Union Bank of India, Bangalore.** Faculty Member, Staff College, Union Bank of India, Bangalore.The Journal of Indian Institute of Banking & Finance October - December 2011 29

special featurestandards pertaining to our product and serviceofferings and hand holding in case of new launchesof products and services and inviting feedbackfor improvement. In December 2010, bank haspartnered with M/s. McKinsey & Company for a projecton customer service excellence for addressingfollowing aspects.Establishing a new model that will enhance deliverymanagement●Streamlining the call centre and alternate channels●Redesigning the key moments of truth●Establishing an enhanced customer grievance cell●Setting up a customer intelligence unit●Already the branch of future generation has beenlaunched at many centers known as Unionxperiencewhich has state of the art pass book printers for useby the customers, auto generation of cheque depositslips for use by the customers themselves, singlewindow for payments up to `1 lac and a branch assistto take care of customer needs. Customer care isnot a department; rather it is an attitude in the bank.Bank has put in place an unique model of root causeanalysis using the 5 WHYS model for moving towardszero tolerance policy on customer grievances.A highly tech savvy public sector Bank is the firstamong the large public sector banks to complete100% Core Banking Solution network. It has recentlycompleted the Core Banking Solution in all it'ssponsored Regional Rural Banks. The first to launchmobile banking the moment RBI gave approval. Itis one among top banks of the country to startInterbank Mobile Payment Service (IMPS). Ontechnology front, customized solutions are beingprovided like Cashless campus project in RajivGandhi Prodyogiki Viswavidyalaya, Bhopal, GeetamUniversity, Vizag and web based packages forcustomized solutions to Kendriya Vidyalaya Sangathanacross the country.The auto indenting of cheque book on exhaustionof 60% of cheque leaves and requesting for chequebook through various alternate channels includingservices like balance inquiry, stop payment of cheques,mini statement etc. is a reflection of commitmentto customer service excellence through technologyexperience. A call centre is operational in 7 regionallanguages apart from a dedicated number forcustomer's calling from outside the country. In theBank technology is not an end in itself but ameans to empower people and achieve customerdelight.Financial Super marketBank has embarked on a path to provide all kinds offinancial services under one roof. It has products thatrange from demat account to online trading facility,health care insurance, life insurance, mutual fund, billpayment, tax payments through various channels andwealth advisory services etc.Reaching the unreachedFor financial inclusion bank has taken anexcellent initiative like launching of dedicated villageknowledge centers for focused growth of ruralmasses. Another milestone is establishment of “UnionMitr” for counseling to rural population in rural areas.Bank has tied up with organizations like FINO forfinancial inclusion through branchless banking mode.Union Bank money is another initiative in rural areasfor cash withdrawals through tie-up with Nokia. “Unionkisan Mitra” a new beginning for hassle free andspeedy disposal of agriculture loans, wherein anyliterate villager is authorized to take care of the lessadvantaged agriculturists in rural area. Union Pragatiis a humble beginning to issue biometric cardsthrough JLGs. “Union Chetna” an information windowavailable for customers during business hours on adigital screen for pursuing goal of financial literacyand awareness through natikas, comic books availablein 18 regional languages. Under “Union inclusions”initiatives biometric card to card remittances formigrant labourers, launching of mobile van bankingto extend banking reach to unbanked villages inOdisha, solar powering of Union Adarsh Gram are keyinitiatives. Under Union Adarsh Gram yojana bankhas launched a campaign in association with TERIto light up all its 103 adopted villages by providingsolar lanterns.30October - December 2011The Journal of Indian Institute of Banking & Finance

special featureCaring different customer segmentsAll the pension disbursals have been centralized whichtakes care of accurate and timely credit. Separate countersare opened for senior citizens in large branches especiallyon pension payment days to convey the message thatBank cares senior citizens.Free collection and remittance facilities to blind,physically handicapped, disabled individuals andinstitutions are set up for their benefit. No servicecharges are collected from freedom fighters on collectionof pension bills and cheques. Instruments favouringPrime Minister's or Chief Ministers relief fund arecollected free of charges. Demand drafts issued intheir favour are also issued free of cost. Freecollection of outstation instruments favouring seniorcitizens, pensioners in rural branches up to `5,000/-representing pension. Concessions to students areoffered for purchase, cancellation of DDs for purchaseof prospectus, application form and payment ofexamination fee. Concession in service chargesare given to widows, aged persons, pensioners receivingpayment instruments. At par collection, remittanceand custody of wills are provided to defence personnel,ex servicemen, paramilitary forces and CISF personnel.Cash deposit charges are exempted in rural andsemi urban branches for depositing in savings accountetc. The guarantee fees and annual service fees ofmicro and small borrowers under MSE segment paidto CGTMSE for obtaining cover are shared by bankon 50:50 basis. Disposal of applications under MSMEare done in 7 days at branch level though RBI timelimits are on a higher side. A quick turnaround timeof 5 days for home loan and 2 days for vehicle or twowheelers loan are adhered to for better customerservice. Female education borrowers enjoy 0.50%interest concession and simple interest is chargedduring moratorium period of education loanees.Bank is creating human capital by offering concessionalrate of interest to students seeking admission to selectprofessional institutes which include IIMs and ISB. Aquote from Mr. Nalin Srivastava, Director Operations atISB Hyderabad- “I have not seen such promptness andhelpfulness anywhere in the world”.Continuing the journeyBank has aspired to become the number one retailbank in customer service excellence. The aim is toachieve this by delivering consistent customer serviceacross touch points through an engaged and motivatedfrontline staff supported by simple processes that arefast, accurate and efficient. The following initiatives aspart of transformation journey are being undertaken.Re-modeling of branches to offer better customerservice through efficient processes, empoweredstaff and automation.●Improving operations at call centre and alternatechannels to provide an effective alternate touch pointto our customers, and thereby allowing branches tofocus on customer service.●Strengthening the customer grievance cell to resolvecustomer complaints and systematically eliminatethe root causes of complaints received across allchannels.●Steps are being taken to train employees throughcustomized courses and delivered through an innovativeapproach. A world class customer intelligence unit isbeing created that will enable a 360 degree view ofcustomers and support business teams through high endcustomer analytics and customer life cycle managementtools. A change management programme is being drawnto help scale up Nav Nirman initiatives.A recent study on India's most customer friendlybanks by outlook money and TNS during October-December 2010 reports Union Bank of India standsat number 5 with only two PSUs ahead of it on thebasis of 17 attributes like customer service, quick andhassle free complaint resolution process, well trainedstaff etc. The bank stood first on parameter “a companythat has a strong focus on innovation” and secondon parameter “does not try to hard sell any productthat consumers do not want”.A customer perception survey was recently conductedby Indian Council for Market Research (ICMR) inassociation with Banking and Finance Magazine (BFM)in five cities across India-Delhi, Mumbai, Kolkata,Chennai and Bangalore with sample size of 3500The Journal of Indian Institute of Banking & Finance October - December 2011 31

special featurethrespondents and published in BFM issue dated 28October to 24th November 2011 issue, wherein UnionBank of India has been ranked the Best NationalizedBank and the fourth best bank among all the banks in thecountry. The 10 parameters of the survey aretrustworthy, response time, well trained staff, phonebanking, ATM network coverage, complaint resolution,banking hour convenience, transaction efficiency anddisclosures.The days are not far off when the Bank will be judgedas number 1 retail bank in customer service excellenceand true to it's tagline “your dreams are not yours alone”.Why Asian Exports Were Worst AffectedEast Asia has particularly benefited from trade liberalization asreflected in the export-led industrialisation in these countries. Thisis perceived to have led to intra-regional spillover effects, mainlyemanating from technological transfers through direct investmentfrom Japan, and indirectly from "hollowing out" of the industrialeconomies. Each shift in the industrial focus of the Japaneseeconomy, from light to heavy electronics and hi-tech industries,created market opportunities for other economies in the region suchas Korea and Taiwan. Even within the electronics industries, midrangegoods gradually began to be supplied by Korea, Taiwan,Singapore, and Malaysia, and only the most sophisticated goodswere produced in Japan. More recently, as Korea, Taiwan andSingapore started specialising in the heavy and hi-tech goodssectors, the light industries were picked up by Thailand, thePhilippines and Indonesia.This sequence of industrialisation, often called the "flying geesepattern", succeeded in the East Asian economies in passing on thecomparative advantages in manufacturing from a leader to thefollowers, and then to the followers' followers. A sequential pattern ofindustrialisation was observed from the agricultural sector to theindustrial sector with small capital requirements to heavy andpetrochemical Industries, and to precision and electronics industries,with latecomers repeating the changes in industrial composition.High exports growth in the Asian countries has been possible on theback of a strong domestic industrial sector which created a base forsustainable growth. The value added in the industrial sector duringthe high-growth phase exceeded 10 per cent (per annum) in theseeconomies. Today, several developing economies in Asia are part ofa manufacturing supply chain for exports to advanced economies. Insome of these countries, like Malaysia, the Republic of Korea,Singapore, Taiwan and Thailand, exports of manufactures representa substantial share of their GDP.On the back of rising manufacturing exports as well as strongdomestic fundamentals, the Asian region has become a strongeconomic driver for the world with a rising share in output, trade andreserves (Table). During the current crisis, however, the abruptdeceleration in growth in Asia was more rapid than in other regions,and in key countries even sharper than at the epicentre of the globalcrisis due to the greater integration of these economies. In manyways, this severe impact was unexpected. Asia is far from theTable : Developing Asia : The EmergingEconomic Driver of the WorldYear Share (%) in the WorldGDP Exports Imports Reserves1 2 3 4 51980 7.2 4.2 4.6 8.61985 8.6 4.9 5.9 15.21990 10.1 5.3 5.8 6.91995 13.5 8.2 8.8 12.32000 15.2 9.6 8.5 15.72005 18.3 12.7 11.9 27.12010 / Latest 22.9 14.5 13.3 33.8Source : WEO database; IFS (IMF).epicentre of the crisis, not just geographically but also in the sensethat it did not indulge in the financial practices that led to seriousproblems in advanced economies' banking systems. Moreover,before the crisis, the region was in sound macroeconomic shape,and thus in a strong position to resist the pressures emanating fromadvanced economies. Therefore, what explains the outcomecontrary to expectations? The answer lies in Asia's exceptionalintegration with the global economy. Much of Asia relies heavily ontechnologically sophisticated manufacturing exports for whichdemand had collapsed. At the same time, Asia's financial ties withthe rest of the world have deepened over the past decade, exposingthe region to the forces of global deleveraging.Countries with a larger share of advanced manufacturing inGDP experienced sharper output declines. The underlying reasonis that advanced manufacturing is more cyclically sensitive thanother items. Growth in Asian economies with a lower share ofmanufacturing, such as commodity exporters, initially held upbetter, although the collapse in commodity prices hit them aswell. The collapse in demand has been transmitted through theintegrated supply chain with dramatic effects on intra-regionaltrade. The current crisis vividly illustrates that Asia has not"decoupled" from the global economy. Synchronised recession inadvanced economies has further complicated the matter during thecurrent crisis as against the experience in 1998 when the decline indomestic demand was offset to some extent by demand emanatingfrom industrial economies.Source : Report on Currency & Finance, 2008-09, RBI32October - December 2011The Journal of Indian Institute of Banking & Finance

special featureCustomer Service in Banks -Banks as Customer Service ChampionsK. J. Paul *Customer Service in banks as an attitude is driven bya vision to be a solution provider with customercentricity rather than a product provider or sales outletand with a mission to earn customer loyalty. Thebusiness relationship should be focused on long termrelationship with a win- win strategy.The Why (Vision), the What (Mission) and the How(Strategy) should be the shared dream of theorganization rendering services and providing solutionswhile believing that customers are really everythingand ever remembering that if we do not take care ofour customers then someone else will.A bank should be able to go about it offering mostreliable and trustworthy services and solutions at thebeginning of the first encounter, and during everyinteraction and transaction on a continuous basis thatresults in transformation from customer contact tocustomer connect and customer loyalty.The journey from customer contact to customer connectsand customer loyalty moves from vendor to enabler topartner to consultant. While customer connect is moretransactional in nature, as we move up the value pyramidwe create customer loyalty that is transformational innature. This alone will go a long way in building long-termcustomer loyalty that is sine quo non for our survival,success and progress.The Customer Experience ChainLoyaltyDelightAssuranceFaithHopeStrive towards higher orders of evolutionProgressiveness& ProactivenessCourtesy,Promptness,Politeness,PatienceWhat Customers Want? The delightful dozen :The most critical needs are :1. They want to see efforts.2. They want to have options.3. They want to be understood.4. They expect speedy service, especially when they are in a hurry.5. They are sensitive to confidentiality.6. They want to be seen as important.7. They like positive surprises.8. They want their needs to be satisfied.9. They want value for money, not just a cheap service.10. They like simplicity and can’t be bothered to understand thecomplexity of our service or products.11. They want to be treated consistently and fairly, especially incomparison with other customers.12. They like reliable service in order to make better decisions.While the material needs need to be taken care of, payingattention to and taking care of the emotional needs likeprompt attention, respect, polite response, importance,fairness, gratitude, appreciation, proactive responsesand occasional concessions will reinforce and acceleratethe transformation to customer loyalty.As Gandhiji had said :Key Service Aspects in the ChainLoyaltyDelightAssuranceFaithHopePassionate,Personalized,PamperingProblem-solving,Understandingcustomer needsStrive towards higher orders of evolution“Consciously or unconsciously, every one of us doesrender some service or another. If we cultivate the habitof doing this service deliberately, our desire for service* Vice President and Head (Learning & Development), AXIS Bank Ltd., Central Office, Mumbai.34October - December 2011The Journal of Indian Institute of Banking & Finance

special featurewill steadily grow stronger, and it will make not only forour happiness, but that of the world at large.”And Ralf Waldo Emerson had said :“As to methods there may be a million and then some, butprinciples are few. The man, who tries methods, ignoringprinciple, is sure to have trouble.”I would like to present 2 case studies on CustomerService.1. Based on a study conducted on causes for CustomerDefection and Loss of Customers in Banks, thefollowing reasons have been identified. You arerequired to rate the reasons in the order of how crucialthey are as perceived by you. The rating should be :a) Against the one you consider most crucial reason.b) Against the one you consider next most crucial reasonand so on, till you have rated all of them.1. Lured by competition2. Product dissatisfaction3. Courting other brands4. High transaction cost and service charges5. Death of customer6. Moving out of town7. Preference for better delivery channels8. Preference for better and cozier service outlets9. Attitude of indifference by the staffIn all group discussions that I have conducted forfocused groups the consensus on the top rated reasonhas always been : Customers are lost mainly becauseof attitude of indifference by the staff.2. REASONS WHY SOME WELL PERFORMINGCOMPANIES FAIL IN THE LONG RUNThis case study is based on a study conducted on causesfor failure of well performing companies in the longrun. The following reasons have been identified. You arerequired to rate the reasons in the order of how crucialthey are as perceived by you. The rating should be :a) Against the one you consider most crucial reason.b) Against the one you consider next most crucial reasonand so on, till you have rated all of them.1. Growing too fast2. Ignoring threats.3. Poor Succession Planning.4. Greed and arrogance.5. Failed synergies.6. Innovating too much.7. Letting Share Price Decide Strategy.8. Growing slow and steady but not fast and consistent.9. Ignoring Customers.In all group discussions that I have conducted for focusedgroups the consensus on the top rated reason why wellperforming companies have failed in the long run hasbeen : Ignoring Customers.The case studies and the consensus views reinforce thebelief that Customers Are Really Everything.Customer segmentation stems from the need to buildand nurture customer relationship and how effectively itis managed. We have moved a long way from the GoodRule of Relationship to the Great Rule of Relationship.The Good Rule :●Treat others the way you want to be treated.The Great Rule :●Treat others the way they want to be treated.I am reminded of what Rita Mae Browne had penned :“Good judgment comes from experience, and oftenexperience comes from bad judgment.”To be a Customer Service Champion one needs to CareMore Than Others Think Is Wise. This is the differentiatorthat should be practiced without discrimination. Thevision should be well connected to the heart and translateinto mission for Customer Care in a bank.The RBI's Master Circular on Customer Service inbanks and the BCSBI's Code of Bank's Commitmentto Customers have already set the bench marks andstandards for expected levels of customer services inbanks and therefore there is an opportunity for theBanks to excel and make the service quality and levelsexemplary while ensuring strict regulatory complianceand following the rules of the game.The Journal of Indian Institute of Banking & Finance October - December 2011 35

special featureCustomer Service - A Study aboutthe Present Practices and ChallengesVenkadasala Moorthy A. *"Quality in a service or product is not what you put into itIt is what the client or customer gets out of it."Says Peter Drucker one of the most influentialmanagement author."Customer service is a series of activities designedto enhance the level of customer satisfaction -that is the feeling that a product or servicehas met the customer expectation." *The above two definitions are suitable to bankingindustry which basically deals with service. Bankshave no physical products which can be distinguishedby its appearance or design. The only differentiation,indeed, is the service level commitment by employeesof the bank to their customers which develops purelyon their relationship. Customer service is a challengingissue in any service sector as it is a very difficulttask to keep pace with and meet the rising aspirationsand expectations of customers. Banks which dealwith the hard earned money of their customer's arerequired to provide not only better service butconsistently as well.Banking industry in India was considered as conventionalsector before a decade. Thanks to the computerisationand CBS (Core Banking Solution) implementation whichhas happened with the keen initiative of RBI. It hasrevolutionized and transformed the face of the bankingindustry. The change has helped the banks to offervariety of new products to their customers and presentnew avenues for accessing their accounts. It also broughtthe challenges which the industry had not faced untilthen. This paper analyses the present practice in thebanking industry in India and envisages the challengeahead of the industry.Customer Services of Banks in India - commonpracticeBy the above definition we can easily conclude thatcustomer service is not what banks offer but what thecustomer gets and how he perceives it. Below are the fewcommon practices in customer service followed acrossbanking industry in India. While some are self initiative,others are mandated by the regulators.Enquiry / May I help you counter :All the banks have an enquiry or may I help you counterin their entrance which addresses all the customer'squeries invariably. Apart from the regular customerwho does the transaction on daily basis, all others canapproach the desk. In most of the banks this counter isplaced in such a way that it looks predominantly in thebranch. The customer service officers who are placed inthe desk are trained to handle all the customer queriesand complaints. Wherever they feel that the query orcomplaint needs to be resolved by another department ofthe bank, they direct the customer to the respectivedepartment. This counter forms the primary interactionpoint with the customers as well as non-customers.Comprehensive Notice BoardRBI vide its circular DBOD. No. Leg. BC. 33 / 09.07.005 /2008-09 dated August 22, 2008 made it mandatory todisplay the various information like Service charges,terms and conditions, interest rates, time norms forvarious banking transaction and grievance redressal allin trilingual through the comprehensive notice board.Today we can see this comprehensive notice board inany bank branch. This information is one of the modes ofimparting financial education and enables the customersto take informed decision about different products and* Head - Branch Operations, The Royal Bank of Scotland N. V., Salem Branch, Tamil Nadu.36October - December 2011The Journal of Indian Institute of Banking & Finance

services. It disseminates the information on grievanceredressal mechanism. Ultimately if the customers gothrough the board, they will come to know their rights andobligation of the banks as well. This will result in qualitycustomer service and awareness as well.Customer Education SeriesThis is one of the recent initiatives among the banks toeducate their customer and to make them aware of theirresponsibility. It assumes great importance with regard todebit / credit cards and online banking services. Becauseeven a casual act by the customers will cause them hugefinancial loss. The banks are making the customer awareof the importance of keeping the Personal IdentificationNumber (PIN) secretly, not sharing user id or passwordsthrough email, etc. The education happens, among others,through various channels like brochures / pamphlets, SMS,emails, notification through statements. This educationseries is available on the internet site of the most of thebanks (i.e. South Indian bank, ICICI Bank and Bank ofIndia). These education series helps the customer torecognize the importance of understanding the bankingproducts and services completely.Customer Service Committee MeetingsIn order to encourage the formal channel ofcommunication between the customer and the bank, RBIhas advised the banks to establish and strengthen branchlevel committee with greater involvement of customers.This committee serves as an opportunity to interact withthe customers and to get their feedback. Since the meetingis mandatory, it helps on part of the bank to understandthe customer expectation and on part of the customersto recognize the banks efforts. It also acts as a forumto discuss various changes that are planned to beimplemented by the bank. The customer can also voice hisconcerns over a range of issues which affect them. Thus itis a win-win solution for both the bank and customer.Citizen's CharterThere was no bench mark level for the customerservice in the banking industry. Each bank was havingits own interpretation on customer service. On occasionof completing fifty years of independence, Government ofIndia introduced the concept of Citizen's Charter in form ofa promise to the consumers from public authority. Theintroduction of Citizen's Charter was an exercise in settingbenchmark for prompt delivery of banking services. Thisalso mandated the banks to come with the charges for theirservices. It also provides a resolution that any customerwho is not getting the service as per the promise couldaccess the grievance redressal machinery of the bank.Regulatory ExpectationsThe Annual Conference of Banking Ombudsmen washeld in the Reserve Bank of India, Mumbai on September5, 2011 which was inaugurated by Dr. D. Subbarao,Governor, Reserve Bank of India. In his inaugural remarks,he stated that, often, prevention was better than cure.In customer service area too, rendering good customerservice was like 'prevention' and was better than the 'cure'which was the various grievances redressal mechanism.True to RBI governor's remarks, the below table andchart shows the number of complaints the BankingOmbudsmen has received from the year 2005-06 to2009-10. This is despite the fact that there are internalgrievances redressal mechanisms before approachingthe Ombudsmen.Table - 1 : Number of Complaints receivedby BO officer in the year 2009-10Period No. of No. of Rate ofBO offices Complaint Increase (% overreceived previous year)during the year2005-06 15 31,732 202006-07 15 38,638 222007-08 15 47,887 242008-09 15 69,117 442009-10 15 79,266 158000070000600005000040000300002000010000031732special featureComplaints38638Figure - 14788769117792662005-06 2006-07 2007-08 2008-09 2009-10Source : Banking Ombudsmen Scheme - Annual Report 2009-10 by RBIIn the past RBI has made several attempts toprovide quality customer service across the industry. In1975, the Government of India had appointed the TalwarThe Journal of Indian Institute of Banking & Finance October - December 2011 37

special featureCommittee on customer service in banks. In 1990,RBI appointed the Goiporia Committee on customerservice in banks. In 2004, the Tarapore Committeerecommendations led to formation of Board levelcommittees for monitoring customer service in banks. In2006, Reserve Bank of India appointed a Working Groupto formulate a scheme to ensure reasonableness ofbank service charges under the chairmanship of Shri.N. Sadasivam. The recommendations of the variousCommittees / Working Groups reflected the need of thetime in which the Committees / Working Groups were setup. Some of them are mentioned below.Goiporia CommitteeRBI had set up in 1990 a committee headed byMr. M. S. Goiporia, then chairman of SBI. The committeehas made various recommendations to improve thecustomer services in the banks. In addition, RBI hasalso issued various general and on specific aspects oncustomer services relating to, name a few, immediatecredit of outstation instruments, payment of interest fordelay in collection of instruments, adherence to timeschedule and issue of cheque books. Goiporia committeehas made 15 core recommendations which includes :Service at countersBusiness and working hoursNominationIssuance of statements and passbooks with correctand legible narrationAdequate infrastructureTime norms for specialized business transactionsAvailability of complaint booksInstant credit of outstation instrumentsPenalty for delay in collection of outstation instrumentsExtended business hours for certain transactions●●●●●●●●●●Damodaran CommitteeRBI had set up in 2010 a committee headed byMr. M. Damodaran, former Chairman, SEBI. The objective,among others, is to review the existing system of attendingthe customers with respect to approach, attitude andfair treatment, Evaluate the present system of grievanceredressal, role of board of directors in customer service.The committee made recommendations ranging fromthe uniformity in account opening forms and KYC toonline grievance redressal system, etc. The importantrecommendation is involvement of boards in customerservice. It involves the proactive role of management inimplementing the guidelines and instructions.The above not only shows the regulatory expectation oncustomer service but also sets the minimum standardson customer service in the banking industry. While manyof the above recommendations are implemented acrossthe industry whether it is followed in letter and spirit is stilla debate. The spirit to meet the customer's expectation issomething which is lacking in the industry. It is not onlythe nationalized banks but also the private sector bankswhich are far beyond the customer's expectation. In factboth Private and Foreign banks amounts to 43% of BOcomplaints in last 5 years. This is followed by SBI 29%and other nationalized banks 26%.Challenges in customer serviceWhy the so called modern tech savvy banks amountto such a large proportion is a matter to be studied indepth. Below are the intricate challenges faced by theindustry which is the primary reason for the above BOcomplaints as well. The below chart portraits the natureof complaints received under different category.Table - 2 : Category-wise receipt of complaintsNature of Complaints Received % to aggregatecomplaints during complaints2007-08 2008-09 2009-10 2008-09 2009-10Deposit 5,612 6,706 3,681 9.7 4.7accountsRemittances 5,213 5,335 5,708 7.7 7.2Credit cards 10,129 17,648 18,810 25.5 23.7Loans and 6,054 8,174 6,612 11.8 8.3advancesCharges without 3,740 4,794 4,764 6.9 6.0noticePension 1,582 2,916 4,831 4.2 6.1Failure to meet 6,388 11,824 11,569 17.2 14.6commitmentsDSAs and 3,128 3,018 1,609 4.4 2.0recovery agentsNotes and coins 141 113 158 0.2 0.2Others 5,900 8,589 18,840 12.4 23.8Out of Subject - - 2,684 - 3.4Total 47,887 69,117 79,266 100.00 100.00Source : Banking Ombudsmen Scheme - Annual Report 2009-10 by RBI38October - December 2011The Journal of Indian Institute of Banking & Finance

Unsuitable products or servicesThe products that the banks offer should meetthe customers' demands and expectations. Of latethere are complaints that the product or servicesoffered to the customers are not satisfying theirexpectation. This is a fact in many of the advisoryproducts such as derivatives, mutual funds andinsurance. RBI has slapped fine on various banksfor selling derivatives without carrying the duediligence with regard to the suitability of productsto the particular customer, the latest one being the`1.95 crore penalty on 19 banks**. Most of theadvisory products such as mutual funds, insuranceare sold without properly illustrating the inherentrisk on the particular products. It is also learnedthat the risk appetite of the customer is also notconsidered by the banks while promoting theseproducts which lead into a feeble situation for thecustomer and the banks.Inadequate knowledge“Caveat Emptor” (Let the buyer beware) may be aknown doctrine in trade. But when it comes to bankingproducts and services the onus lies on the banksto make the customer aware of the risk in therespective products. Morally the doctrine applieshere is “Caveat Venditor” (Let the seller beware).The word morally is used here as there is no legalbinding on the banks when the customer signs theapplication along with terms and conditions. But ifthe details are made known to the customer beforetaking the decision, it would avoid many embarrassingsituations later. We are witnessing large number ofcomplaints on credit cards and loans. Credit cardcomplaints tops the above BO complaint table forthe year 2008-09 and 2009-10 with 25.5% and 23.7%respectively. This arises out of the ignorance of thecustomer on part of the billing or payment cycle.Failure to meet commitmentsWhen a commitment is made by the bank, it shouldbe honored with out fail. If the commitments comeswith any pre-condition that should be informed tothe customer well in advance. There are cases wherespecial featurethe commitment is partially / not fulfilled. This leadsto the dissatisfaction which ultimately leads to losingthe customer or facing the legal action and sometimesboth. The presence of numerous print and onlinemedias makes the situation worse as they publishsuch negative news with greater importance. Thistarnishes the reputation of the banks. There are 14.6%BO complaints received in the year 2009-10 under thecategory failure to meet commitments.All the above clearly narrates the lack of transparencyand lack of awareness. A well informed ordinarycustomer is far better than an ignorant but loyalcustomer.What is an ideal customer service?The above question arises in our mind when wetalk about customer service. We can say that itis the most difficult question to answer. Because idealcustomer requires to deal with the expectationsand perception of the customer. Most of the Indiancustomers are not outspoken. They hardly expressthemselves even when they are asked for a feedback.In majority of cases dissatisfied customer neverconveys the same to the respective authorities. Theysimply walk away from the existing bank and lookfor another one. Often they narrate the same totheir friends and relatives and advise them not tobank with the particular bank.On the other hand an effective and consistentcustomer service serves as a marketing as wellas growth tool. A happy customer introduces newcustomers. Good, consistent service also helps toretain the existing customers. Because of recurringnature of the banking services, customers alwaysexpect same level of service in their each interaction.Moreover a good service helps to enhance therelationship value of the existing clients. This is inmarketing terms known as “Customer Loyalty” whichmakes the customer to use the services more oftenand brings even more customers. The| cost ofacquiring a new relationship is higher. Longer therelationships lower the cost. A customer who stayswith us for a long time thus increases the profitability.The Journal of Indian Institute of Banking & Finance October - December 2011 39

special featureGood customer services also serves as an“Exit barrier” which stops a customer from switchingone bank to another. Thus an efficient and dynamiccustomer service contributes the profit of theorganization as well as its growth.RBI in its BO - Annual report 2009-10 has emphasizedthe following principles to deal with customer.1. Minimum courtesy and behavioral standards2. Transparency3. Non-discriminatory policy4. Deliver what is promised5. Allowing seamless 'switching' of products withoutexcessive penalty6. Appropriateness of 'sell' and7. Firm and polite stand against unreasonable customerdemandsWhile the above principles emphasize the minimumstandards on customer service, given below are thecertain qualities of ideal customer service which isbased on the above.Customer Satisfaction and trainingCustomer satisfaction is a measure of how product,service, support and engagement are able tomeet the customer expectations. The importantaspect here is the customer expectation. In order tounderstand the customer's financial needs, the banksshould train their staff, vendors and DSAs adequately.Raising customer's needs requires some expertiseknowledge. The banks over the last two decadeshave stepped into new path and now have trulybecome a supermarket for financial products. Productofferings are no longer limited to accounts, depositsand forex alone. It ranges from life insurance, generalinsurance, mutual funds, credit cards to derivativeproducts, online trading etc.This diversity calls for multitasking skills and depthin product knowledge. The banks should havetraining programs in place which refreshes the staffand gives the direction as to how to handle theseissues. Even a simple act of acknowledgement likesmile and welcoming makes the customer feelcomfortable. When a customer is recognized properlyhis confidence increases. There should be a rotationpolicy among the staff within the same branch. Ithelps everyone to understand and equip them tohandle the customers. The products and servicesare not going to satisfy the customer. It is thesupport and engagement from the staff that winsthe confidence of the customer. The customer getsgreater satisfaction when the involvement of staff isbetter.Creating awarenessThe customers may not go through all the termsand conditions. There are many cases where theytrust the banks and sign the documents blindlythough it is not a good practice. The banks shouldmake the customer aware of the terms andconditions by adopting the Damodaran committeerecommendations which says that it should be in locallanguage which makes the customer comfortable.Important points, such as charges and interestrates, in the terms and conditions should be givenin tables so that it attracts the attention of thecustomer. Whatever features that are promised interms and conditions should be delivered relentlessly.The change in terms and conditions and anyother charges should be informed to the customerin all possible methods. This includes letters, displayof a notice board of the branch, SMS, email and ifpossible advertisements. The customer must beeducated about all the important rates and conditionsbefore signing the loan documents.Proper redressal mechanismWhen a customer approaches the bank with hiscomplaint or a grievance, if the query does notpertain to the particular department, he is directedto the concerned department. This makes thecustomer to run from pillar to post without arrivingfor a solution. Instead the banks should have adedicated counter which will provide a referencenumber to the customer irrespective of the natureof the complaint. The unit can coordinate with the40October - December 2011The Journal of Indian Institute of Banking & Finance

elevant department and resolve the customerquery. Even the May I Help You / Enquiry counterscan be trained for this activity. Once the complaintor query is resolved, the same can be informed tothe customer. So this counter acts as a one pointcontact for customer for all his queries. The customerneed not approach different departments for hisqueries.The banks should also have the fixed time toresolve each query which may be based on thenature of the query. Once the customer approacheswith his complaint or query, he can be given a referencenumber and expected resolution time for the same.In case the customer feels the time is too long or heis in urgency, importance can be given to the particularcase and can be resolved on priority basis. This isalso recommended in the chapter 4 of Damodarancommittee recommendations.Technology - A boon or bane?Innovation and growth of the modern technologyhas changed the face of the industry. It providesan opportunity for the banks to offer various newproducts. But the challenge it throws on the industry isalso equally high. While the technology has enhancedthe convenience and comfort of the customers, it alsopresents lot of challenge in the form of hacking andmisusing. This exposes the customers to unanticipatedfraud and there by causing them huge financial losses.The aggressive promotion of credit / debit cards andother electronic channels have increased the usageamong the bank customers. But such things will haveadverse impacts if they are not promoted with properawareness and knowledge.This hurdle can be overcome only by creatingthe awareness among the customer as well as staff.The banks have already realized this error and arenow taking the assertive steps to prevent any furtherlosses or re-putational damage. Technology in thehands of proficient person is always a benefit.Equal and Non- discrimination in serviceFair treatment of all customers is another importantfactor in customer service. The common practice amongthe banks is to classify the customer accordingto the balance or the multiple product holdings. Thecustomer with the higher balance is given priorityover others. The banks can justify this as priorityservice to their premium customers but it leads todiscriminate the common customer. There are certainminimum basic service levels to be maintained andadhered for all the customers. The priority servicescan be above the minimum service level. While theproduct differentiation aims to suit different customerbasis their affordability, there should not be anydifferentiation in the basic service level. With hugepopulation still to be covered by banking service, fairtreatment will ensure faith of the existing customerswho will bring new customers eventually.Conclusionspecial featureIt is always a challenge to maintain higher customersatisfaction level. There are efforts to standardizethe common practice across the industry byregulators and self regulatory and professionalassociations. While the process and products canbe standardized, what is impossible is to standardizethe customer aspirations and expectations. Eachcustomer has different needs and each need requiresdifferent approach. Especially a country like Indiawhich is multi-faced with different linguistic andcultural background, each geographical area requiresdifferent level of service. Personalization is a veryessential aspect in customer service. It is also thedemanding side of the customer service. The importantstep in personalization is to recognize the individualneed. Social habits also play an important role ineffective customer service. This is evident with thestrength of regional banks.Each bank will have its own product and process.But the attitude and approach are important factorswhile serving a customer. The banks should alsoremember the fact that a customer once lost islost for ever. The customer will not return until andunless some miracle happens. Winning customermeans winning business. Customer service is notto be treated just a desk or a counter but shouldbe an attitude and way of life. Customer serviceThe Journal of Indian Institute of Banking & Finance October - December 2011 41

special featureshould be continuous and consistent. How muchever expenses the organization spends on products,interior or design, adds meaning only when thecustomers feel comfortable with the organization.This comfort can only be arrived by constant andrelentless customer service.It would be apt to conclude with the quote given byMahatma Gandhi which describes the best practice oncustomer service. “A customer is the most importantvisitor on our premises. He is not dependent on us. Weare dependent on him. He is not an interruption in ourwork. He is the purpose of it. He is not an outsider in ourbusiness. He is part of it. We are not doing him a favor byserving him. He is doing us a favour by giving us anopportunity to do so.”Sources* Turban, Efraim (2002). Electronic Commerce : A ManagerialPerspective. Prentice Hall. ISBN 0131854615Asset Liability Mismatches (ALM) in the Indian Banking Sector : The Extent and Persistence** RBI press release dated Apr 26 2011. See also website(http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24300)The analysis of the maturity profile of long-term assets andliabilities indicates that at the aggregate level, the long-termassets are financed by short-term liabilities. The ALM calculatedas long-term assets minus long-term liabilities never turned outto be negative during the recent years implying that the highergrowth observed in the long-term loan segment is leading to assetliability mismatches in the banking sector. Bucket-wise break-upof ALM positive gap shows that the banking sector has the highestALM positive gap in the bucket more than five years followed by3 - 5 years and 1 - 3 years. As at end-September 2010, ALMpositive gap in the more than five years bucket constituted 42per cent of the total ALM positive gap, followed by 3 - 5 years bucket(31 per cent) and 1 - 3 years bucket (27 per cent).An analysis of persistence of the positive ALM gap is carriedout following the methodology developed by Marques (2004).Accordingly, the persistence of ALM positive gap is estimatedon the basis of absence of mean reversion, that isγ= 1 -n_T )Where n stands for the number of times the series crossesthe mean during a time interval with T + l observations. It istheoretically proved that for a symmetric zero mean whitenoise process E (γ) = 0.5. Thus, if the value of γis close to0.5, it means that there is no significant persistence. Onthe other hand, if the value of γis significantly above 0.5 itsignals the existence of significant persistence. Under theassumption of a symmetric white noise process (zeropersistence), the statistic][γ-0.5 ________ 0.5 ∩N (0;1) Tis used for testing the statistical significance of the measure ofpersistence γ.)b Acceptance of the null hypothesis of zero persistence at 5 per centlevel.Note : Number of Observations used for the analysis is 55.The value of y for the ALM positive gap during the entiresample period, i.e., March 2006 to September 2010 for allSCBs is 0.47, which is slightly lower than 0.5. This indicatesthat there is no significant persistence in the ALM positivegap during the period under study at the aggregate level.The bucket-wise analysis of persistence shows that in noneof the time buckets, the persistence is significant at five percent level. However, at ten per cent level, it is persistent in the'one to three years' time bucket. Thus, in sum, though at theaggregate level, the ALM positive gap is not significant, in the'one to three years' bucket it is significant and calls for carefulmonitoring (Table).Reference :Table : Measure of Persistence ofALM Positive Gap - Bucket-wiseTime Buckets Persistence (γ) Significance(y-0.5) / (0.5 / T)bOne to Three Years 0.60 1.483 (0.0606)bThree to Five Years 0.47 -0.404 (0.3264)bMore than Five Years 0.47 -0.404 (0.3264)bTotal 0.47 0.405 (0.3264)Marques, Carlos Robalo (2004), 'Inflation Persistence : Factsor Artefacts?', Working Paper No. 371, June, European CentralBank.Source : Report on Trend & Progress of banking in India, 2010-11, RBI42October - December 2011The Journal of Indian Institute of Banking & Finance

special featurePankaj K. Agarwal *Performance of Public Sector Banks in theNew Economy : A Comparison withPrivate Sector BanksDr. R. N. Rai **AbstractBanking sector has long been considered the backboneof any economy. Recent banking crises in US andother countries and ensuing recession globally havesevere repercussions on employment, incomes andoverall well- being of the global economic system.The new economy ushered in private sector banksin India almost a decade back to increase competition.Public sector banks (PSBs) still retain the largestshare of the market in banking space, but privatebanks have been considered to pose a formidablesurvival threat to PSBs. The present article attemptsto compare the performance of PSBs with theirprivate sector counterparts on globally acceptedCAMEL model.Key Words : Private Sector Banks, CAMEL, PublicSector BanksINTRODUCTIONThe importance of banks in economic developmentof nations cannot be overemphasized. However,importance of a strong banking system entered eventhe popular imagination in the wake of banking crisisof west. Enhancing efficiency and performance of thebanking system is a key objective of economic reformsof many countries including India. Indian banking isparticularly interesting because of different andchanging regulatory environment and diversity ofownership : SBI group, nationalized banks, privatelyowned Indian and foreign banks. The public sectorbanks (PSBs) acquired a place of prominence in thefinancial intermediation process over the years. Theymade significant strides in expanding geographicalcoverage, mobilizing savings and providing fundsfor investments in priority sectors. Such a processwas achieved within a highly regulated environmentwith interest rates, credit allocation and entry beingcontrolled by the Reserve Bank of India. Howeverduring late 1980s, most banks were plagued withpoor profitability and under-capitalization with a highproportion of non-performing assets and hugeadministrative expenditure. They lagged behind theinternational standards in introducing computers,communication technologies and product innovationsand the quality of consumer service was unsatisfactory.Then private sector was permitted in to banking andmany players entered the field.At the beginning of banking sector reforms it wasfelt that PSBs shall not be able to withstand thecompetitive pressure from private sector banks(PVTBs). However, the entry of PVTBs has not onlygiven the consumers better banking services, it hasalso forced PSBs to go for a makeover.Many important insights can be gained from comparingthe performance of PSBs vis-a-vis the PVTBs.REVIEW OF LITERATUREAll firms, and particularly banks - due to their specialnature- can be compared with other firms on anumber of parameters. The central banks acrossthe world have been endeavoring to create a robustmonitoring and appraisal system for banks. In India,the approach to onsite inspection of banks inaccordance with the recommendations of thePadmanabhan Working Group (1995) has beenadopted from the cycle of inspection commencing* Research Scholar, Dr. R. M. L. Awadh University, Faizabad.** Head, Department of Business Management and Entrepreneurship, Dr. R. M. L. Awadh University, Faizabad.The Journal of Indian Institute of Banking & Finance October - December 2011 43

special featureJuly 1997. It focuses on the mandated aspects ofsolvency, liquidity, financial and operational health,based on modified version of CAMEL model, viz.CAMELS, which evaluates banks' Capital Adequacy,Asset Quality, Management, Earnings, Liquidity andSystems and Control, shedding the audit elementsunder the existing inspection system. (Bodla andVerma, 2006).In 1995, Padmanabhan working group submitted itsreport on On-site supervision. The recommendationsincluded supervisory interventions along withformulation of a rating system for banks similar toCAMEL model, customized for Indian conditions(Bodla, Ibid). Narsimham Committee (1998) alsorecommended measures like introduction of IRACnorms along with provisioning and capital adequacy.RBI recognizes CAMEL ratings as an appropriatetechnique for evaluating the performance of banks.Ratings are assigned for each component on ascale of 1 to 5. The worst rating is 5, which meansthat a bank is in imminent danger of failure. Aggregaterating is the sum total of the ratings under all thefive components. These ratings, ranging from 1 to 5,are described as 'Strong', 'Satisfactory', 'Fair', 'Marginal'and 'Unsatisfactory', in the same order (Mittal andDhade, 2009).CAMEL is essentially a diagnostic tool for detectingpotential problems in banking sector. The objective isthat banks conduct a critical self-analysis of thefinancials and a subsequent review by their boardsfor health-check. Further, this analysis is sent to RBIas a supplement to the system of off-site monitoringof banks. An efficient result oriented on-site inspectionsystem requires an efficient follow-up. Thus thepresent supervisory system in banking sector is asubstantial improvement over the earlier system interms of frequency, coverage and focus as also thetools employed. Nearly one-half of the Basle CorePrinciples for Effective Banking Supervision hasalready been adhered to and the remaining is at astage implementation. These ratings would enable theRBI to identify the banks whose conditions warrantsspecial supervisory attention (Bodla, Ibid).We may draw upon the following literature for developinga conceptual framework.Sathye (2005) tried to assess the efficiency ofbanks post-privatization. Satish, Jutur, Sharath andSurender (2005) also used CAMEL model forperformance assessment of Indian Banks. Theyanalyzed the performance of 55 banks for the year2004-05 using CAMEL model. The findings pointedtowards soundness of the Indian Banking systemand need for adoption of latest IT tools for future.They also highlighted imminent plans of Bank's IPOsfor augmenting Tier-1 capital in line with Basel-2 norms.Prasuna (2004) analyzed the performance 65 banksfor the period 2003-04 adopting CAMEL model. Theauthor highlighted that owing to heightened competition,customers were getting better service quality, innovativeproducts, and better bargains. They also highlightedthe need for banks to realign their strategic focus inview of transition phase towards imminent firming up ofinterest rates.Veni (2004 as cited by Bodla, Ibid) studied the capitaladequacy of banks and the measures adopted by themto strengthen it. The author highlighted that the ratingagencies give weightage to Capital Adequacy Ratios ofbanks while rating the Bank's certificate of deposits, fixeddeposits and bonds. They normally adopt CAMEL modelfor rating of banks. Thus capital adequacy is considereda key element in Bank Rating.Kumbhakar and Sarkar (2003) also tried to assessderegulation, ownership and productivity growth inIndian banking. Kick and Koetter (2003) tried to assessthe probability of ordered failure events in GermanBanks using CAMEL model. Barr; Seiford and Siems(1993) attempted to study 930 banks over a five yearperiod to search for leading indicators for predictingbank failures in US. They attempt to quantify themanagerial efficiency (“M” of CAMEL), citing it as keyin bank performance. For, they used a multi-dimensionaldata-envelopment-analysis (DEA) model. They foundthat differences in “M” scores are detectable longbefore failure occurs and increase as the failure dateapproaches.44October - December 2011The Journal of Indian Institute of Banking & Finance

special featureGodse (1996) also studied CAMEL for evaluatingperformance of banks.Rao and Dutta (1998, cited by Bodla, Ibid) attempted toderive rating based on CAMEL. In their study, based onthese five groups (C-A-M-E-L-S), 21 parameters in allwere developed. After deriving separate rating foreach parameter, a combined rating was derived forall nationalized banks (19) for the year 1998.It wasfound that the worst rating was that of Indian Bankpreceded by UCO Bank, United Bank of India, SyndicateBank and Vijaya Bank.On making review of previous studies, we conclude thatthey used CAMEL model for ranking / rating of the banks.In this light we propose to make a comparative studyof performance of public sector and private sector banksin India.DATA & METHODOLOGYThe period of study in this paper is financial yearending March 31, 2010. The data has been collectedfrom Annual Reports of the Banks and CMIE PROWESSdatabase.There are total 55 scheduled commercial banks inIndia (www.rbi.org.in). Out of this 28 are in publicsector and 27 are in private sector. The populationis too small to permit sampling. Therefore, entirepopulation has been considered. However, sincesome of these banks are not yet a public limitedcompany, their financial data is not available inpublic domain. Therefore, 26 public sector banksand 22 private sector banks, whose data wasavailable in CMIE PROWESS database, constituteour population.The CAMEL model has been used as a measuringinstrument to capture the performance of variousbanks. The difference of means test and t-statistichas been used on the significance of difference ofresults of these banks on various parameters ofperformance as obtained by CAMEL model.The CAMEL model is described as under :CAMEL is a ratio-based model for evaluating theperformance for banks. Various ratios forming thismodel are as follows :C A M E LCapitalAdequacyAdvancesto AssetsCapitalAdequacyRatioDebtEquityRatioG-Secto totalInvestmentsAssetQualityGrossNPA toNetAdvancesNet NPAto NetAdvancesNet NPAto TotalAssetsTotalInvestmentto TotalAssetsCapital Adequacy:ManagementEfficiencyBusinessPerEmployeeProfit PerEmployeeTotalAdvancesto TotalDepositsEarningsQualityInterestIncometo TotalIncomeNet Profitto AverageAssetsNon-interestIncometo TotalIncomeOperatingProfits toAverageWorkingFundsSpreadto TotalAssetsLiquidityG-Secto TotalAssetsLiquidAssets toDemandDepositsLiquidAssetsto TotalAssetsLiquidAssetsto TotalDepositsBanks must maintain depositor's confidence andprevent bankruptcy. Capital serves as a cushionto absorb unexpected performance shocks andinspires depositors' confidence while denotingstability and efficiency of financial system. Capitaladequacy represents the overall financial conditionand ability of the management to raise additionalcapital. Capital Adequacy Ratio indicates degree ofbank leverage. It's measurement is done by :1. Capital Adequacy Ratio :The banks are required to maintain the minimumCAR as specified by RBI from time to time, whichcurrently stands at 9%. It is arrived at by dividing thesum of Tier-1 and Tier-2 capital by aggregate ofRisk Weighted Assets (RWA).CAR= (Tier-1 + Tier-2)/ RWATier-1 capital includes equity capital and freereserves.Tier-2 capital includes subordinate debts of5-7 years tenure, revaluation reserves, generalprovisions and loss reserves, hybrid debt capitalThe Journal of Indian Institute of Banking & Finance October - December 2011 45

special featureinstruments and undisclosed reserves andcumulative perpetual preference shares.The higher the CAR, the stronger the bank isconsidered, as it insures the bank againstbankruptcy.2. Debt Equity Ratio :A measure of leverage, it indicates the proportion ofbank business is financed through debt and equity. Itis computed by dividing total outside liability by networth. “Outside liabilities” comprise total borrowings,deposits and other liabilities. “Net worth” includesequity capital and reserves and surplus. A high DEratio indicates reduced protection for the creditorsand depositors.3. Advances to AssetsThis is the ratio of the Total Advances (includingreceivables) to Total Assets (excluding revaluation).An indicator of a bank's aggressiveness in lendingwhich ultimately results in better profitability, thehigher the ratio, the better.4. Government Securities (G-Secs) to Total Investments :The risk taking ability and appetite of a bank is alsoreflected in the proportion of its investments made inG-Secs. It also reflects availability (or dearth) ofalternative investment opportunities. GovernmentSecurities offer lowest returns, being virtually riskfree. A higher proportion of banks investment madein G-Secs indicates that banks' investments havelower risk.Asset Quality :The quality of assets is a critical parameter for gaugingthe strength of the bank. Essentially, it is measured bycomputing the proportion of Non-Performing Assets(NPAs) in total assets. This reflects the quality of loansand advances the bank has made to generate interestincome. Thus, asset quality also reflects the type ofborrowers the bank is having. The ratios necessary toassess assets quality are :1. Gross NPAs to Net Advances :It is a measure of the quality of assets in thatsituation, where provisioning has not been made forloss of NPAs. This ratio is computed as proportion ofGross NPAs as a percentage of Net Advances. Thelower the ratio, the better is the asset quality.2. Net NPA to Net Advances :Net NPAs are Gross NPAs net of provisions onNPAs and suspense account. In this ratio, NetNPAs are measured as a percentage of NetAdvances. It is the most important yardstick ofassets quality. The lower the ratio, the better theasset quality is.3. Total Investment to Total Assets Ratio :This ratio is used as a tool to measure thepercentage of total assets locked up in investments,which, by conventional definition, doesn't form part ofthe core income of a bank. It is arrived at by dividingtotal investments by total assets. This ratio indicatesthe extent of deployment of assets in investmentother than advances. The high investment includesdepreciation cost as well and hence needs to beprovided for, thus reducing profitability. A higher levelof investment may also indicate poor credit off-takeor conservative lending. A higher ratio means thatthe bank has conservatively kept a high cushion ofinvestments to guard against NPAs. This low riskapproach results into lower profitability.4. Net NPAs to Total Assets :This ratio measures the credit risk assessmentefficiency of the bank and its debt-recoveryperformance. This ratio is arrived at by dividing theNet NPAs by Total Assets (excluding revaluationreserves). A lower ratio implies better performance.Management EfficiencyIn any organization, Management Efficiency is thedifference between success and failure. In the CAMELmodel, the ratios to assess it involve a subjectiveanalysis. The management of the bank takes crucialdecisions moderated by its risk perception. It directs theorganization's efforts towards realizing its visionachieving its goals. This parameter is used to evaluatemanagement efficiency as to assign premium to betterquality banks and discount to poorly managed ones. Theratios used to evaluate management efficiency are :46October - December 2011The Journal of Indian Institute of Banking & Finance

1. Total Advances to Total Deposits :This ratio measures the efficiency and ability of thebank's management in converting the depositsavailable with the bank (excluding other funds likeequity capital, etc) into high earning advances. Totaldeposits include demand deposits, savings deposits,term deposits and deposits of other banks. Totaladvances also include receivables.2. Business Per Employee :This is an employee productivity measurementratio. This tool measures the efficiency of all theemployees of a bank in generating business forthe bank. It is arrived at by dividing the totalbusiness by the total number of employees. Bybusiness we mean the sum of Total Advances andTotal Deposits in a particular year. A higher ratio isconsidered better.3. Profit Per Employee :This ratio shows surplus earned per employee.It is arrived at by dividing the Profit after Tax(PAT) earned by the bank by the total numberof employees.Earnings QualityIt is important for any bank to have sustained resilienceto earn consistently in future. Earnings quality refersto the profitability and growth potential of earnings.Sustainability of earnings also depends on the share of“income from lending operations” in the total income,lending being the core activity of a bank. Of late, manybanks have seen much of their income coming throughnon-core activities like investments, treasury operationsand corporate advisory services etc. Earnings qualitycan be measured by the following ratios in terms ofincome generated by core activity-income from lendingoperations :1. Operating Profits to Average Working Funds Ratio :This ratio indicates how much a bank can earn(operating profit) from its operations net of theoperating expenses for every rupee of workingfunds. This is arrived at by dividing the operatingprofits by average working funds. Average workingspecial featurefunds is a daily average of total assets / liabilitiesduring a year. The higher the ratio, the better itis. An efficient utilization of funds will result inhigher operating profits. Banks with better abilityto use their assets efficiently will tend to have abetter average than the industry.2.Spread or Net Interest Margin to Total Assets :NIM is the difference between the interest income(including dividend income) and the interestexpended (including interest paid on deposits, loanfrom the RBI, and other short-term and long-termloans). as a percentage of total assets, shows theability of the bank to keep the interest on depositslow and interest on advances high. It is an importantmeasure of a bank's core income (income fromlending operations). A higher spread indicatesbetter earnings given the total assets.3. Net Profit to Average Assets :Profit to average assets indicates the efficiencyof the banks in utilizing their assets in generatingprofits. A higher ratio indicates the better incomegenerating capacity of the assets and betterefficiency of management. It is arrived at bydividing the net profit by average assets, which isthe average of total assets in the current year andprevious year. Thus this ratio measures the returnon assets employed. Higher ratio indicates betterearning potential in the future.4. Interest income to total income :This is yet another measure to assess bank's abilityto earn income from its core lending operations,expressed as a percentage of the total incomegenerated by the bank in a year. Interest income isthe basic source of revenue for a bank. Interestincome includes income on advances, interest ondeposits with the RBI and dividend income.5. Non-interest income to Total Income :Fee based income constitutes a lion's share ofa bank's other income. It is generated throughinnovative products and adopting the technologyfor value-added services. This stream of revenueThe Journal of Indian Institute of Banking & Finance October - December 2011 47

special featureis independent of the bank's capital adequacyand consequent potential to generate income isimmense. This ratio measures the income fromoperations, other than lending, as a percentage ofthe total income. Non-interest income is the incomeearned by the banks excluding income on advancesand deposits with the RBI. The higher ratio indicateshigher proportion of fee income.LiquidityLiquidity and cash assets are critical for any financialfirm. Banks have to take proper care in hedgingliquidity risk while at the same time ensuring that its fundsare invested in high-yielding investments. Banks needto generate profits without compromising a minimumliquidity. The ratios suggested to measure liquidity underCAMEL Model are as follows :1. Liquid Assets to Total Assets :Liquid Assets include cash in hand balance withthe RBI, balance with other banks (both in Indiaand abroad), and money at call and short notice.Total assets include the revaluations of all theassets. This ratio indicates the overall liquidityposition of the bank.2. G-Secs to Total Assets :Government securities are the most liquid andvirtually risk-free. This ratio measures G-Secsas a proportion of total assets Banks investin government securities primarily to meet theirSLR requirements, which is around 25% of netdemand and time liabilities. This ratio measuresthe risk involved in the assets held by a bank.3. Liquid Assets to Demand Deposits :This ratio measures the ability of a bank to meetthe liquidity requirements of demand deposits.It is arrived at by dividing the liquid assets bytotal demand deposits. Demand deposits offer highliquidity to the depositor and hence banks have toinvest these assets in highly liquid assets includecash in hand, balance with the RBI, balance withbanks (both in India and abroad), and money at calland short notice.4. Liquid Assets to Total Deposits :This ratio measures the liquidity available to thedepositors of a bank. Total deposits includedemand deposits, savings deposits, term depositsand deposits of other financial institutions. Liquidassets are defined in this ratio too in the samemanner as in the previous one.ANALYSIS & FINDINGSCapital adequacy :Out of the three yardsticks used in the CAMEL model toassess the capital adequacy, a comparison has yieldedthe following results :PSBCAR DER ADVTA GSTIPVTB PSB PVTB PSB PVTB PSB PVTBMean 12.47 16.67 1.04 0.65 60.77 55.57 85.03 76.47t Stat -2.95 2.40 3.26 2.67Significance *** ** *** ***** Significant at 1%, ** Significant at 5%The first ratio is the capital adequacy ratio, in which wesee a highly significant difference between privateand public sector banks. It turns out that the privatesector banks have out-performed their public sectorcounterparts by a wide margin (t=-2.95). It appears thatthe private sector banks have consolidated their capitalbase in order to send out a strong message to depositorsin the wake of recent banking crisis engulfing west. Wecan also observe significant difference between thesebanks in Debt-Equity ratio. The higher mean debt equityratio of public sector banks is in line with their lower CAR.The same trend is witnessed in case of Advances to TotalAssets Ratio. Here again the difference between thesetwo categories of banks is highly significant. The higherratio is in line with the lower CAR and goes against thepopular perception of defensiveness of PSBs in lending.Another reason why PSBs have a lower equity baseis their ownership. Public Sector Banks have majorityownership resting with the Government and hence thesebanks are constrained in raising capital without dilutingGovernment ownership.However, on G-Sec to Total Investments Ratio, it isthe Public sector banks that have out-performed the48October - December 2011The Journal of Indian Institute of Banking & Finance

special featureprivate sector ones. This inference is naturally expectedsince traditionally PSBs have been a parking lot forgovernment's borrowing program.Asset quality :GNPANA NNPANA TITA NNPATAPSBPVTB PSB PVTB PSB PVTB PSB PVTBMean 1.50 2.33 0.62 0.93 27.44 29.72 0.37 0.51t Stat -2.02 -1.49 -2.14 -1.25Significance ** - ** -** Significant at 5%The asset quality of PSBs is superior as reflected in theratio of Gross NPA to Net Advances (t =-2.02). However,there is no significance difference between PSBs andprivate sector banks in the ratio net NPA to NetAdvances. This is again corroborated in the ratio of netNPAs to Total Assets. This means though Private sectorbanks have higher gross NPAs but their provisioningis also higher and thereby the Net NPA ratios arecomparable to those of PSBs.In 2009, the Reserve Bank advised SCBs to maintainprovisioning to NPA ratio to not less than 70 pc bySeptember 2010. Between 2009 and 2010, the coverageratio of provisions to NPAs of SCBs declined from52.1 per cent to 51.5 per cent (RBI, 2010). The declinein coverage ratio could be seen mainly in the caseof nationalized banks. The ratio declined substantiallyby about 8 percentage points for nationalized banksbetween 2009 and 2010. As against this decline, the ratioincreased by about 7 percentage points for private sectorbanks (RBI, 2010).Management :TADVTD PPE BPEPSB PVTB PSB PVTB PSB PVTBMean 70.83 69.50 0.049 0.041 7.95 5.67t Stat 0.53 0.690 2.14Significance - - **** Significant at 5%After the advances, the second most important categoryof income-generating assets is investments made bythe bank. Here, the private sector banks have higherproportion of funds locked up in investments than PSBs(t = -2.14). This finding is on expected lines since onthe capital adequacy parameter, it was found thatthe advances to total assets ratio was higher in caseof PSBs.The parameter management reflects the productivity ofthe manpower in a bank. We observe that there is nosignificant difference in private and public sector bankson the parameter total advances to total deposits. ThePPE, a measure of branch level employee productivity, ismarginally higher in case of public sector banks, but thedifference is not significant statistically. For the FY 2010,the mean profit per employee for PSBs is at `4,90,560,against a mean of `4,14,330 for PVTBs. However, forFY 2010, mean business per employee of public sectorbanks (`7.95 crore) is far higher than the privatebanks (`5.67 crore). This is highly significant difference(t = 2.14). This is a pointer to poor operating efficiencyof PSBs, who are not able to generate higher profitabilitydespite higher business. The higher operating costsof PSBs are constituted largely by employee costs. Mostof the PSBs have large legacy manpower, whereasthe PVTBs have focused on technology to drive theirbusiness and employ far less manpower.Earnings :OPAWF NIM PATAA IITI NIITIPSB PVTB PSB PVTB PSB PVTB PSB PVTB PSB PVTBMean 1.92 2.19 2.18 2.51 0.97 0.90 86.91 84.69 13.09 15.31t Stat -0.93 -1.72 0.39 1.96 0.68Signifi- - - * - - - ** - - -cance** Significant at 5% * Significant at 10%We saw earlier that PVTBs had higher PPE despite theirBPE being lower than PSBs. This is further supported bythe findings in ratio of operating profits to averageworking funds. Though there is no statistical differencebetween the operating profits to average working fundsratio of these two categories of banks, the mean ratio ofPSBs is lower than PVTBs.Another critical measure of bank profitability is spread.As anticipated, we find significant difference in NIMs ofboth the categories of banks. However, an importantobservation here is that though traditionally PSBs havehad access to low-cost deposits, their NIM is lowerthan private sector counterparts owing to lower interestThe Journal of Indian Institute of Banking & Finance October - December 2011 49

special featurecharged on advances. This may be due to strongercommitment of PSBs to low-yielding priority advances.We observe no significant difference in the ratio PATto average assets. This ratio indicates the incomegenerating capacity of the assets and here it appears thatboth PSBs and PVTBs have similar income generationpotential.We find that the PSBs significantly outperform thePVTBs on the ratio of interest income to total income.This finding is corroborated in the complementaryratio of Non-interest income to total income. The findingpoints to the product innovation strongly pursued bythe PVTBs. PSBs have traditionally been lendersand they have lagged behind the private sector banksin creating non-fund based income opportunities forthemselves.Liquidity :LATA LATDPSB PVTB PSB PVTBMean 8.71 10.64 10.16 13.37t Stat -1.45 -1.91Significance ** **** Significant at 5%The PSBs have underperformed PVTBs in liquiditymeasures as well. This finding is in line with the highercapital adequacy observed earlier in case of PVTBs. ThePSBs have underperformed PVTBs significantly on boththe liquidity measures, namely Liquid Assets to totalassets as well as liquid assets to total deposits.SUMMARY OF FINDINGS AND CONCLUSION1. PSBs have lower capital adequacy than PVTBs. Thereason appears to be the higher equity base of PVTBsand low debt. The PSBs are more aggressive inlending. However, the PSBs appear to have parkedmore funds in Government securities than the PVTBs.2. The asset quality of PSBs is superior to PVTBsreflected in their gross NPAs. However, PVTBs havetaken prudential and mitigating measures and there isno significant difference in the net NPA performance ofthese banks. However, PSBs have parked fewerfunds in investments than the PVTBs.3. The management efficiency of PSBs is similar to thatof PVTBs in that there is no significant difference intheir ability to convert deposits into loans and profit peremployee. However, business per employee in caseof public sector banks is far superior to the privatesector banks.4. The earnings performance of PSBs is also notvery different from the PVTBs. However, PSBs areoperating on a thinner spread owing to low yieldingloans despite their having better access to low costdeposits than PVTBs. However, the income of publicsector banks is mainly interest income. The non-fundbased income (or fee income) of PSBs is significantlylower in comparison to the PVTBs.5. On liquidity yardstick, the PVTBs have outperformedthe PSBs. They have more investment in liquidassets in proportion to both their total assets andtotal deposits respectively.Although the findings of this research may not bein line with the popular perception that PSBs havebetter capital adequacy and liquidity than the privatesector banks, it cannot be gainsaid that PSBs doneed marked improvement in the capital adequacy,operational efficiency and liquidity. It will be in the longterm interests of the banks as well as economy.References- Barr; R. S., Seiford; L. M. and Siems ; T. F. (1993)“An Envelopment - Analysis Approach To Measuring TheManagerial Efficiency Of Banks” Annals Of OperationsResearch 45 (1993) 1-19.- Bodla, B. S. and Verma R. (2006), ‘Evaluating Performanceof Banks through CAMEL model : A case study of SBI andICICI’ ICFAI Journal of Bank Management, Vol - V, No.3,pp 49-63.- Chakraborty K. C. ( 2005), “ Management of NPAs: Trends andChallenges”, Chartered Financial Analyst, Vol 10, p 30.- Chakraborty R. and Chawla G. (2005), Bank Efficiency InIndia Since Reforms : An Assessment”, Money and Finance,Vol - 2, p 31.- Chartered Financial Analyst magazine, various issues- CMIE - Prowess database .- Godse V. T. (1996), “CAMEL for Evaluating the performanceof Banks”, IBA Bulletin, Vol - 18, No. 8, p 8.- Government of India (1998), “ Report of the committee onBanking Sector Reforms” (Narsimham Committee Report-2),New Delhi.50October - December 2011The Journal of Indian Institute of Banking & Finance

special feature- Indian Banks Association : Performance Highlights of PublicSector Banks, Private Sector Banks, various issues- Kick, Thomas and Koetter, Michael (2007) “ Slippery Slopesof Success: Ordered Failure Events In German Banking”Discussion Paper, Series : 2, Banking and Financial Studies,No. 3/2007, Deutsche Bundesbank.- Kumbhakar, C. Subal and Sarkar, Subrata (2003), “Journal ofMoney, Credit and Banking, Vol - 35, No. 3.- Mittal M. and Dhade A.” Awareness and Perception of CAMELRating across Banks : Some Survey Evidence “The IcfaiUniversity Journal of Bank Management, Vol - VIII, No. 2, 2009,52-64.- Sathye, Milind (2005), “Privatization, Performance and Efficiency: A study of Indian Banks”, Vikalpa, Vol - 30 No. 1m, 7-16.- Shanmugam, K. R. and Dass, A. (2004), “Efficiency of IndianCommercial Banks during the reform period”, Applied FinancialEconomics, Vol 14, 681-686.- www.rbi.org.in, official website of Reserve Bank of India- RBI (2010), “Report on Trends and Progress of Banking in India”.ABBREVIATIONS :APPENDIXADVTA - Advances to Total Assets RatioBPE - Business Per EmployeeCAR - Capital Adequacy RatioDER - Debt Equity RatioGNPANA - Gross NPA to Net Advances RatioGSTI - Govt. Securities to Total Investment RatioIITI - Interest Income to total income RatioLATA - Liquid Assets to Total Assets RatioLATD - Liquid Assets to Total Deposits RatioNIITI - Non-Interest Income to total Income RatioNIM - Net Interest Margin (Spread) to Total Assets RatioNNPANA - Net NPA to Net Advances RatioNNPATA - Net NPA to Total Assets RatioNPA - Non- Performing AssetsOPAWF - Operating Profit To Average Working Funds RatioPATAA - Profit After Tax to Average Assets RatioPPE - Profit Per EmployeePSB - Public Sector BankPVTB - Private Sector BanksSCB - Scheduled Commercial BankTADVTD - Total Advances To Total Deposits RatioTITA - Total Investments to Total Assets RatioTypology of Conventional and Unconventional Measures of Central BanksMeasures Rationale InstrumentsI. Conventional1. Open Market Operations To achieve nominal anchor Repos, lending and Issuance of central bank bills.(OMOs) and StandingFacilities (SFs)2. Open market foreign To achieve nominal anchor or smooth Cash, swaps, derivatives.exchange operations exchange rates3. Direct instruments To complement OMOs and SFs Reserve requirements and credit ceilings.4. LOLR to institutions To ease financial conditions or market Discretionary lending.and marketsliquidity stressII. UnconventionalA. LiquidityEasing Measures1. Direct instruments in To improve monetary transmission and Reserve requirements and regulatory liquidity ratios.money marketsrestore market stability2. Systemic domestic To enhance monetary transmission Unlimited domestic liquidity provision, broadening theliquidity arrangements and restore market stability list of counterparties and easing collateral requirements.3. Securities liquidity To improve monetary transmission Exchange of illiquid for liquid securities.provisionand restore market stabilityB. Credit Easing To enhance monetary transmission Purchase of targeted private securities, direct creditMeasures and restore credit market functioning provision, provision of liquidity to investors in targetedsecurities.C. Quantitative To enable monetary transmission when the Unsterilised outright purchase of governmentEasing Measures policy rate approaches the zero lower bound securities and foreign exchange.D. Foreign ExchangeEasing Measures1. Foreign exchange To ease foreign exchange Unlimited liquidity provision, broadening of collateralliquidity injection liquidity pressures and counterparties.2. Cross-central bank currency To support national bank's foreign Swaps.swap arrangementsexchange operationsSource : Currency & Finance 2008-09, Reserve Bank of India (RBI).The Journal of Indian Institute of Banking & Finance October - December 2011 51

special featureMicro Finance Institutions in India - Their roleand relevance in Financial InclusionDasarathi Mishra *Microfinance is an important component of thefinancial inclusion. To give a fillip to microfinance as aninstrument to inclusive growth, Central Government,Reserve Bank of India and NABARD have takenseveral measures for the last two decades. In discussingthe journey of microfinance institutions in India, thesubject is divided into five sections. The first sectiongives a dimension of financial exclusion - a look intothe past; while the second section gives a briefaccount of the approach to financial inclusion. Thethird section gives an account of microfinance, conceptsand developments, including international experience.The fourth section touches upon Khan WorkingGroup; while fifth section summarises recommendationsof the Andhra Pradesh Micro Finance Institutions(Regulation of Money Lending) Act, 2010. The sixthsection encapsulates the recommendations of theMalegam Committee; while the concluding sectiongives an outlook for the future.Section : IDimension of financial exclusion - a peep into the pastIndia has a long history of financial exclusion. Way backin 1951-52, All-India Rural Credit Survey highlightedthe low borrowing pattern of the rural households fromdifferent credit granting agencies. The pre-ponderanceof informal credit in rural sector has also been highlightedby All India Debt & Investment Survey of 1992.The group to examine issues relating to Rural Credit andMicrofinance (Khan Working Group) constituted by RBI(2004), in its report observed that there continues to bewide gaps in the availability of banking services in ruralareas as the Scheduled Commercial Banks covered only18.4 per cent of the rural population in deposit accountsand paltry 17.2 per cent by way of loan account. Bankingsector has shown propensity towards large ticketaccounts, the small borrowers with credit limit less than`25,000 has decreased progressively from 5.88 crore in1991 to 3.69 crore in 2003. Even the Primary AgriculturalCredit Societies (PACS) with about one lakh outfits theextension of credit has been minimal and further theseare concentrated in a few states. Further, the reportpinpointed that there are several reasons for the ruralpoor remaining excluded from banking system. Theseare : high transaction cost at client level, cumbersomedocumentation and procedures at the formal sector, lackof awareness, small size of loan, availability of doorstepservices from informal sector and indifference of theformal banking system.RBI, in the Annual Policy Statement 2005-06, hadshown deep concern on the exclusion of vast sectionsof the population from the formal financial system andinitiated measures to improve the position.The “Committee on Financial Inclusion”, 2008(Chairman : Dr. C. Rangarajan) referring to NSSOdata highlighted that 45.9 million farmer householdsin the country accounting 51.4 per cent do not haveaccess to institutional or non-institutional credit. Despitevast network of bank branches only 27 per cent of thetotal farm households have access to bank finance. TheCommittee has mentioned “the poorer the group, thegreater the financial exclusion”.The World Bank study used an yardstick called FinancialAccess to assess the degree of financial inclusion. This isin terms of number of bank branches, ATMs per 1,00,000persons. India ranks low compared to some of theimportant economies, as may be seen from the following :* Former Chief General Manager, Reserve Bank of India.52October - December 2011The Journal of Indian Institute of Banking & Finance

special featureCountry No. of branches No. of ATMs perper 1,00,000 persons 1,00,000 personsIndia 6.33 1.63China 1.33 3.80Australia 24 115Canada 28 158UK 23 97USA 26 134Source : Kiatchai Sophastienphong and Anoma Kulathunga, 2009,Getting finance in South Asia, Indicators and Analysis ofCommercial Banking sector, World Bank.This trend underscores the extent of financial exclusionand need for strengthening financial inclusion.Section : IIApproach to Financial InclusionFinancial inclusion has been defined as the extensionof affordable financial services viz., loans, access topayment and remittance facilities by formal financialinstitutions to those that were financially excluded.There is clearly an enormous gap when it comesto access to and delivery of financial services. TheIndian policy approach since 2000 has been focussedon individuals and households. Central Governmentand Reserve Bank have pronounced their concomitantcommitment towards financial inclusion. RBI exhortedbanks, in 2005, to make available a basic "no-frills"banking account. In order to address the issues offinancial inclusion in a holistic manner, the Governmentof India constituted a “Committee on Financial Inclusion”under the chairmanship of Dr. C. Rangarajan. TheCommittee submitted its final report in January 2008.The major recommendations of the Committee included :i) Launching of a National Rural Financial InclusionPlan (NRFIP) in mission mode with a clear targetto provide access to comprehensive financialservices, including credit, to at least 50% (say 55.77million) of the financially excluded rural households,by 2012 through rural / semi-urban branches ofCommercial Banks and Regional Rural Banks. Theremaining households have to be covered by 2015.ii) Constitution of two funds with NABARD - theFinancial Inclusion Promotion & DevelopmentFund (FIPF) and the Financial Inclusion TechnologyFund (FITF) with an initial corpus of `500 croreeach to be contributed by GoI / RBI / NABARD.The FIPF will focus on Farmers’ Service Centres,promoting Rural Entrepreneurship, Self-Help Groups,promotion of Resource Centres and while the FITFwill focus on funding of low-cost technology solutions.iii)Deepening the outreach of microfinance programmethrough financing of SHG / JLGs and setting upof a risk mitigation mechanism for lending to smallmarginal farmers / share croppers / tenant farmersthrough JLGs.iv)Opening of specialised microfinance branches / cellsin potential urban centres for exclusively catering tomicrofinance and SHG - bank linkages requirementsof the urban poor. An enabling provision be made inthe NABARD Act, 1981 permitting NABARD to providemicro finance services to the urban poor .As financial inclusion has emerged as a big challenge inthe public policy domain, actions have been initiatedprogressively by GoI / RBI / NABARD for implementingthe recommendations of Rangarajan Committee.Particularly, the following significant steps have beentaken by RBI :Public sector and private sector banks were advisedin 2010 to put in place a board approved FinancialInclusion Plan ( FIP) for the next three years endingMarch 2013.●The self-set targets by these banks include openingof brick and mortar branches in rural area,employment of Banking Correspondents, coverage ofunbanked villages with above 2000 etc. All villagesabove 2000 population are to be provided access tofinancial services by March 2012.●These targets are monitored by RBI.●It may be noted that, as on March-end 2010commercial banks have got a branch network of84,604, of which 38.4 percent are located at ruralcentres. Relatively low penetration of bank branchesat rural centres is being experienced as only 30,000out of 6,00,000 habitations have a banking presence.The Journal of Indian Institute of Banking & Finance October - December 2011 53

special featureAs the target of having a physical banking facilityin every habitation is unrealistic, the inclusion strategyis largely based on the use of Information andCommunication Technology (ICT), expansion of bankingaccess virtually through the mechanism of a BusinessCorrespondent (BC), opening of off-site ATMs, andproviding mobile banking. As indicated in the MonetaryPolicy Statement, 2011-12, of the Reserve Bank, bankscovered 24,066 villages with population above 2000 and19,271 villages with population less than 2000. It hasbeen reported in the Economic Times (June 13, 2011)that deeper banking spread has become urgent becausegovernment plans to provide direct cash subsidy forfertilizer and kerosene to 40 crore poor from March 2012.Section-IIIMicro finance- concept and developmentThe term microfinance denotes small scale financialservices - both credit and savings - that are extendedto the poor people of the society. Micro Finance(Development & Regulation) Bill, 2010 defines microcredit not to exceed `50,000 per borrower. According toProf. Sriram, microfinance in India started in the early1980s in forming formal self-help group (SHG) and hadgrown rapidly in the last two decades. The movementstarted in participation of informal sector, particularly byNGOs. The movement entered the second phase in1992 with participation of formal sector like commercialbanks, co-operative banks and Regional Rural Banks.Thus, 1992 can be termed as turning point in the historyof microfinance movement in India.Self / Help Group - Bank Linkage Program (SBLP)Reserve Bank of India through NABARD, introduced apilot project in 1992, for purveying micro credit to therural poor by linking Self Help Groups (SHG) withcommercial banks, co-operative banks and RegionalRural banks. Since then it has made rapid strides. TheSHG-bank linkage model of micro credit has evolvedas an effective and successful model to extend creditto poor. RBI issued comprehensive guidelines tobanks in February 2000 for mainstreaming microcredit and augmenting the outreach of micro creditproviders. These guidelines stipulated that micro creditextended by banks to individual borrowers directly orthrough a financial intermediary would be reckoned aspriority sector lending.There is an exponential growth of SBLP as may begauged from the following table :March-end No. of SHGs Bank loans {Cumulativefinanced by banks disbursement} (` crore)1999 32,995 572000 114,775 1932001 263,825 4812002 461,478 1,0262003 717,360 2,0492009 1,610,000 12,2542010 1,590,000 14,453Source : Report on Trend and Progress of Banking in India,Reserve Bank of IndiaJoint Liability Groups approachA Joint Liability Group (JLG) is an informal groupcomprising of 4 to 10 individuals for the purposes ofavailing bank loan either singly or through the groupmechanism against mutual guarantee. JLG performsthe function of screening high-risk borrowers fromthe pool of loan applicants. Groups are formed onthe basis of self-selection by borrowers who live in thesame community, and who are well acquainted witheach other. A person regarded as a high-risk borrowerby others will not be included in a group since he is morelikely to default and would cast a financial burden on therest. Besides excluding bad borrowers, group formationencourages "peer-monitoring" activities.Lessons from international experienceBangladesh is a prime mover in microfinance. TheBangladesh Grameen Bank model is pioneer forfinancing the poor and downtrodden. The micro financeprogram in Bangladesh is widely studied and accepted.Today, the idea of small, collateral-free loans for poorwomen known as 'microcredit' or 'microfinance' hasbecome a commonplace around the world. According toNobel Laureate Mohammed Yunus, micro finance is aform of social business that can eradicate poverty. “ Youcan provide micro credit to poor people so they cancreate their jobs through self-employment”. Professor54October - December 2011The Journal of Indian Institute of Banking & Finance

Yunus also focuses on new category of businessnamed social business. This is a no-loss, no-dividendpaying company dedicated to solving economic orsocial problems.Micro Finance Organisations (MFO) in Bolivia had hugesuccess.It permitted a financial NGO (PRODEM) to bepromoted to a chartered bank (BancoSol). All MFOs , inBolivia, have received financial support from donors andgovernment.In Kenya, M-PESA has a success story in the fieldof money transfer and remittance, which has benefittedthe poor to the maximum. Kenya is the first countryin the world to use m-money services via M-PESAto transfer of money through mobile phone channel,in a cost effective and secured way. Microfinanceborrowers can receive and repay loans using thenetwork which enabled the MFIs to offer loans atmore competitive rate. Central Bank of Kenya oversightand supervision over M-PESA.According to management guru Prof. C. K. Prahalad'sanalysis in his much-acclaimed book “The Fortune at theBottom of the Pyramid”, MFIs remain virtually importantas a financial gateway to the poor. In 1997, the Micro-Credit Summit was formed to exchange ideas and start aglobal campaign dedicated to reach out to 100 million ofworld's poorest families by 2005. In 1997, fewer than 8million of the world's poorest received microcredit.According to the Summit 2011, more than 128 million ofthe world's poorest received a microloan in 2009-anall-time high. Assuming an average of five members perfamily, a total of 640 million persons are benefitted, whichis greater than the combined population of EuropeanUnion and Russia. The Microcredit Summit campaignaims to reach 175 million of the world's poorest familyby 2015 and ensure that 100 million of these familiesmove above the World Bank's $1.25-a-day povertythreshold. The success story shows that poor peoplecan be valuable clients.The importance attached to microfinance can be gaugedfrom the fact that United Nations Economic and SocialCouncil proclaimed the Year 2005 as International Yearof Microcredit for “building inclusive financial sectors andstrengthening the powerful but untapped entrepreneurialspirit existing in the communities around the world”.Further, in 2009, the G 20 Leadership Summit in Torontoendorsed the importance of the work done by the G-20Financial Inclusion Experts Group. The group releasednine “Principles for Innovative Financial Inclusion” whichis very significant for policy makers in various countries.This focuses on : cultivating a broad-based governmentcommitment to financial inclusion, promotingtechnological and institutional innovation as a means toexpand financial system access and usage, promotingfinancial literacy etc.Section-IVUnion Budget, 2005-06 and RBI follow-upIn a major policy announcement on micro-financialinstitutions, the Hon'ble Finance Minister stated in theUnion budget 2005-06 that :At present micro finance institutions (MFI) obtain financefrom banks according to guidelines issued by ReserveBank of India. MFIs seek to provide small scale creditand other financial services to low income householdsand small informal businesses. Government intends topromote MFIs in a big way. The way forward is to identifyMFIs, classify and rate such institutions and empowerthem to intermediate between the lending banks and thebeneficiaries.In this backdrop, RBI constituted an internal group inMarch 2005, under the chairmanship of Shri H.R. Khan,(now Deputy Governor) RBI, with terms and references,inter alia, to identify steps to be taken to promote MFIsand propose a system for their classification and ratingand to examine the extent of regulation of MFIs.Khan Working Group (2005)special featureIt is to the credit of Khan Working Group that hasundertaken an in-depth study of the existing MFIstructure in India and discussed at length the innovationand experiments in Bangladesh, the Philippines, SouthAfrica, Brazil, Kenya in bridging the banking outreachin rural sector. It studied and analysed the existingregulatory framework and need for a new and exclusiveregulation for MFI sector. The Working Group broadlyThe Journal of Indian Institute of Banking & Finance October - December 2011 55

special featurerecommended that : (i) Business Correspondent Modelto be implemented for expansion of banking outreach,(ii) a separate and exclusive regulatory supervisoryframework for MFIs may not be required for thepresent, as the major players undertaking micro creditare well regulated and there would be host ofdifficulties in terms of cost and outreach in bringing inlarge number of amorphous entities under a centralregulatory framework, (iii) Non-deposit taking MFIswith help of SIDBI and NABARD may attempt forself regulation (iv) setting up of national MicrofinanceInformation Bureau, (v) direct finance facilities byMFIs from NABARD, (vi) rating of MFIs (vii) capacitybuilding in MFIs, (viii) extending outreach throughICT. The Group said it may not be appropriate to fixany ceiling on interest rates. However, it cautionedthat cost of credit should not be usurious. The Groupsuggested that comprehensive regulatory frameworkmay be taken up for a review at a later stage. As a riskmitigation measure, banks may adopt a 'consortiumapproach' for proper exchange of information whilelending to MFIs. While certain recommendationsof the Khan Working Group to expand the outreachof banking in rural sector have been implemented,certain recommendations on MFI needed further study,including by the Malegam Committee in 2010.Section-VRecent developments in MFI sector and concerns forpublic policyThe Andhra Pradesh Micro Finance Institutions (Regulationof Money Lending ) Act, 2010Large-sized MFIs are operating in the state ofAndhra Pradesh. Adverse developments were reportedin the form of high interest charged by certain MFIs,coercive method of recovery, poaching of SHGsby MFIs, multiple financing by the MFIs leading toover indebtedness by the poor households etc. Inthis backdrop, Government of Andhra Pradesh, inOctober 2010, issued Andhra Pradesh Micro FinanceInstitutions (Regulation of Money Lending) Ordinance,2010 to “curb the undesirable operations of MFIs”in the state. State of Andhra Pradesh passed AndhraPradesh Micro Finance Institutions (Regulation ofMoney Lending) Act, 2010 replacing the Ordinance.The Act is applicable to NBFCs doing microfinancebusiness in the state.The Act purported to “protect women SHG from theexploitation” by MFIs in the state. The Act rolls out thefollowing :All MFIs operating in Andhra Pradesh shall within30 days apply for registration before the Registeringauthority.●Members of one SHG shall not to be member of morethan one SHG.●All loans by MFIs have to be without collateral.●Maximum amount of interest was stipulated; theaggregate interest not to exceed the principal amount.●MFIs must display the rates of interest in their premises.●No MFI shall extend further loan to an SHG where theSHG has an outstanding loan from a bank.●MFIs shall not deploy agents for the recovery.●Repayments have to be made at the office of the GramPanchayat or at a designated public place.●Loan recoveries have to be made only in monthlyinstalments.●Carrying business without registration and indulgingin coercive recovery method would attract penalty byway of imprisonment .●There was criticism against the AP Ordinance, as itwas perceived that the Act was passed in hastewithout informed public debate and consultations withthe stakeholders. Proponents of MFI viewed that it mayserve as a retrograde step in the financial sector reform.It is worth mentioning that World Microcredit AnnualReport, 2010 discusses the issue of initial publicoffering (IPO) by two microfinance institutions :Compartamos in Mexico and SKS Micro Finance inIndia. Critics worry that investors profiting from theindustry created specifically for poor may underminethe perception, objective and integrity of themicrofinance sector. In this context, Dr. MohammedYunus, the pioneer of the Grameen bank movement56October - December 2011The Journal of Indian Institute of Banking & Finance

in Bangladesh had made a note-worthy statement.He mentioned that 'for-profit' micro finance institutionsare no different from traditional money-lending activityand should be subject to law relating to money-lendingor treated with other financial intermediary performingsimilar functions.Section-VIMalegam Committee - its constitution andrecommendationsReserve Bank of India, on October 15, 2010 constituteda sub-committee of its Central Board to study the issuesand concerns in the microfinance sector in India, in thewake of the Andhra Pradesh Ordinance and micro financecrisis surfaced in Andhra Pradesh. The Committee, interalia, included noted industrialist Shri. Kumar MangalamBirla, Deputy Governor Dr. K. C. Chakrabarty, Smt. ShashiRajagopalan, an expert on microfinance sector.The Terms of Reference of the Committee, inter alia,were to review, examine and recommend :the definition of 'microfinance' and 'Micro FinanceInstitutions' for the purpose of regulation.●the practice of MFIs in regard to interest rates, lendingand recovery practices .●the objectives and scope of regulation of NBFCsundertaking microfinance and the regulatoryframework.●the applicability of money lending legislation of theStates and other relevant laws to NBFCs / MFIs.●the role of associations and bodies of MFIs could playin enhancing transparency and disclosure.●the conditions under which loans to MFIs can beclassified as priority sector lending.●The Malegam Committee submitted its Report, on January19, 2011, has made far-reaching recommendations, whichwould shape the policy framework of the microfinancesector in India.The significant recommendations are encapsulatedbelow :1. An NBFC classified as NBFC-MFI should satisfy thefollowing conditions :special feature2. Not less than 90 per cent of its assets (other than cashand bank balances and money market instruments)are in the nature of “qualifying assets”. The aggregateamount of loan given for income generation purpose isnot less than 75 per cent of the total loans extended bythe MFIs.3. There should be a margin cap of 10 per cent in respectof MFIs which have an outstanding loan portfolio of`100 crore and a margin cap of 12 per cent in respectof MFIs with an loan outstanding not exceeding of`100 crore, at the beginning of the year. Further, thereshould be a cap of 24 per cent on individual loans.4. To achieve transparency in interest rates, there shouldbe a standard loan agreement. The effective rateof interest charged by MFIs should be prominentlydisplayed in all of its offices and its web-site. TheMFI should provide a loan card to its borrowershowing effective rate of interest, loans and conditionsattached to the loan, acknowledgement of the MFI ofthe payments received.5. To tide over multiple lending by MFIs, over-borrowingby the individuals, the Committee recommended thatMFIs should lend to an individual only as a memberof a JLG and should ensure that the borrower is not amember of another JLG / SHG.6. To provide a data base for capturing all outstandingloans to individual borrowers as well as thecomposition of SHG and JLGs, the Committeerecommended setting up of one or more creditinformation bureaus and all MFIs be required tobecome member of such bureau.7. To put a check on coercive method of recovery,the Committee recommended that field staff ofMFIs should not be allowed to make recovery atthe residence or work place of the borrower andall recoveries be made at the Group level at adesignated central place.8. As more than 75 per cent of the funds of MFI are frombanking system, it is necessary that there is adequatesafeguards for maintaining solvency. The Committeehas, therefore, recommended that an MFI shouldrequire to maintain aggregate provision which shallThe Journal of Indian Institute of Banking & Finance October - December 2011 57

special featurebe higher of : 1 per cent of the loan portfolio, or 50 percent of the total loan instalments which are overduefor 90-180 days and 100 per cent of loan instalmentswhich are overdue for 180 days or more.9. On the issue of priority sector lending, the Committeerecommended that the advances to MFIs which do notcomply with the regulation should be denied “prioritysector lending” status.10.On regulatory compliance, the Committee hasrecommended that the primary responsibility forensuring compliance should rest with the MFI itselfand its management must be penalized in theevent of non-compliance. RBI should have thepower to remove the Chief Executive Officer andits director in the event of persistent transgressionof regulations.11.The Committee observed that several stategovernments have enacted Moneylenders Act.Some of them do not specifically exempt registeredNBFCs from their fold. The Committee recommendsthat NBFC-MFIs should be exempted from theprovisions of the Money Lending Acts, in view ofthe augmented regulation of the sector.12.The Committee was of the view that the needfor a separate Andhra Pradesh Micro Finance(Regulation of Money Lending) Act, 2010 wouldnot survive as here are serious problems whenthe regulation is given to multiple agency. ReserveBank of India currently regulates NBFC-MFIs. If theState Government also becomes a regulator, therewould a risk of regulatory arbitrage.RBI initiativesTo assess the ground level situation in AP after theordinance, Reserve Bank of India held discussionswith select banks. It then informed banks thatthe collections by MFIs had got a hit and the therewere some incipient signs of contagion spreadingto other states. The banks were permitted torestructure loans extended to MFIs, even these wereunsecured. The measure was to give some liquiditysupport to MFIs and facilitate a 'holding on' operationin the interregnum.As part of implementation of Malegam Committeerecommendations, Reserve Bank has advised banksdefining “qualifying assets” :The loan is given to a borrower who is a member ofhousehold whose annual income does not exceed`60,000 in rural areas and `1,20,000 in non-ruralareas;●The amount of loan does not exceed `35,000 in thefirst cycle and `50,000 in the subsequent cycle;●The loan is collateral-free;●The tenure of loan is not less than 24 months wherethe loan amount exceeds `15,000;●The loan is repayable in weekly, fortnightly andmonthly instalments at the choice of the borrower.●Section-VIIConcerns and Challenges in Microfinance Sectori) CapitalNBFCs those conduct microfinance business andregistered with RBI require to maintain minimum netowned funds and are required to maintain CRARof 15 per cent. In respect of other MFIs, there is nosuch statutory mandate. Actually, the capital base ofsuch MFIs are very low. To increase the microfinancebusiness, they need to augment their capital base.ii) Reliance on borrowing from banks / financialinstitutionsWith limited capital funds, the MFIs heavily relyon the borrowings from banks / financial institutions.One MFI is reported to have borrowing arrangementfrom more than 45 banks / FIs. This heavy relianceon bank borrowing has also negative impact on theirbusiness growth and continuity.iii)Rapid growthAccording to Malegam Committee report, as onMarch 31, 2010, the number of loans serviced bythe MFIs and balance outstanding had been `2.67crore and `18,344 crore respectively. The rapid growthalso accompanied with concerns of multiple lending,over-borrowing, ghost borrowers and coercive methodsof recovery.58October - December 2011The Journal of Indian Institute of Banking & Finance

special featureiv)Loan pricingWith deregulation of interest rates, Reserve Bankhitherto, had not prescribed any interest rate ceilingon loan products. The high internal cost such as staffcost, overheads has pushed up the interest rates onloans by the MFIs. As documented by the Committee,larger MFIs have charged interest as high as 50.63 percent with average of 36.79 per cent. The loan pricingwould continue to remain a challenge for MFIs and theregulators.v) Methods of recoveryThere were reports in the press that certain MFIs haveresorted to coercive methods for recovery of loans. Thisbrings bad name to the MFI sector. To obviate suchpossibility, the MFIs should follow Code of Conduct of theself regulating bodies. NBFC-MFIs should have Boardapproved Fair Practices Code and method of recovery.vi)Credit Information BureauCredit information, used judiciously, can prevent multiplelending. In this context, Malegam Committee hasrecommended that one or more credit informationbureau be set up and MFIs be required to becomemembers of such bureau. It may be noted that in India,credit information companies (CIC) viz Credit InformationBureau of India, Equifax, Experian have been set upunder Credit Information Companies (Regulation) Act,2003 and registered with RBI. But the Committee hasrecommended to set up separate credit bureau in respectof MFIs, without giving logic why the existing CICs cannotbe allowed for the purpose.vii)Corporate sizeThe Malegam Committee has recommended that allNBFC-MFIs should have a minimum Net Worth of `15crore.viii)Regulatory architectureAppropriate regulatory framework is a sine qua nonfor the balanced growth and sustenance of theMFI sector. In his address at the Conference of theState Financial Secretaries in May, 2011, GovernorDr. D. Subbarao mentioned about the implementationof the Malegam Committee Report in the context ofregulating microfinance institutions. He indicated thatwhile the incorporated MFIs would be regulated bythe Reserve Bank, the unincorporated MFIs would beregulated by the proposed central regulation, to avoidpossible regulatory arbitrage.ix)Governance structureThere is no statutory requirement on the compositionof Board, induction of independent directors, Committeeof Board, Audit Committee. The governance structureof MFIs are very week and needs revamping.x) Ombudsman Scheme for MFIsTo address the complaints from borrowers there shouldbe a Grievance Redressal Mechanism in the MFIs.Further, as recommended by the Malegam committee,the institution of independent Ombudsman should beexamined.References1. Building Social Business, (2010) Mohammad Yunus, BBSPublications.2. The Fortune at the Bottom of the Pyramid, (2006),C. K. Prahalad, Wharton School Publishing.3. Dr. Samapti Guha, Microfinance for Micro Enterprises, (2010) -An Impact Evaluation of Self-Help Group, Occasional Paper,NABARD4. Dr. Subir Gokarn, Financial Inclusion - A consumer-centric view(March 2010), VI. V. Narayanan Memorial Lecture, at SastraUniversity, Kumbakonam.5. M. S. Sriram & Rajesh S. Upadhyayula, (2002) TheTransformation of the Microfinance Sector in India, paperpresented at SIDBI workshop at Indian School of Business.6. Dheeraj Tiwari, Not Just Big, Every village to be Covered underInclusion Drive, Economic Times (June 13, 2011).7. Report of the Internal Group to Examine Issues Relating toRural Credit and Microfinance, (2005), Reserve Bank of India.8. Annual Report, (2008-09), NABARD9. Master Circular on Priority sector advances, Reserve Bankof India.10.Report on Trend and Progress of Banking in India, (2009-10),Reserve Bank of India.11.Report of the Sub-Committee of the Central Board of Directorsof Reserve Bank of India to Study Issues and Concerns in theMFI Sector, (2011), Reserve Bank of India.The Journal of Indian Institute of Banking & Finance October - December 2011 59

BOOK REVIEWspecial feature60Name of the Book : Financial Policies and Everyday Life - The Indian ContextAuthor : S. S. TaraporePublished by : Academic Foundation, New DelhiPrice : ` 850/-No. of Pages : 306Reviewed by : Prof. R. D. Pandya, VadodaraAs it is generally known, when professional economists write books, articles or columnsin the journals, they are mainly addressed to the fellow economists, research scholarsin economics and to the policy makers. They are generally written in English. There arein fact very few professional economists who contribute books or articles in thevernacular languages for the benefits of general readers or aam aadmi. It is generallybelieved as indicated by Dr. A. P. J. Abdul Kalam, former President of India, that thestudents should learn the subject of science through their mother tongue so that they canimbibe and understand the contents of the subject of study. In fact when late Dr. I. G. Patel,who studied economics in the University of Cambridge in UK, returned to India, he wasadvised by his teachers that he should teach economics in vernacular language inIndia. This indeed indicates that the study of any subject in mother tongue is indeed usefulto understand the subject and participate in the discussion.Shri S. S. Tarapore, former Deputy Governor, RBI has precisely done this when hewas invited by “Divya Bhaskar”, a Gujarati daily to contribute a column in economicsfor the paper. Shri S. S. Tarapore recognizes that general reader could be baffled orconfused by the jargons in economics and therefore, it is his belief that it is the dutyof economists to make efforts to reach out and assist common persons to comprehendthe essence of financial polices to facilitate the understanding and making considereddecisions in the area of economic policies.Shri Tarapore has now come out with a publication “Financial Polices and Everyday life -the Indian context”. There are in all 70 articles or columns in this book which is dividedinto 8 Parts. This volume presents for the first time articles written in “Divya Bhaskar” forEnglish speaking readers.The book attempts to bring out the essence of monetary policy from the view pointof the common man who can understand how the monetary policy of RBI is formulatedand entangles on individuals. Sometimes, Shri Tarapore differs with the monetarypolicies pursued by the RBI but on the whole he believes that the RBI has handledmonetary policy deftly through difficult times. The book also deals with the implicationsof the interest rate policies as well as fiscal policies as they influence the commonpersons.It is interesting to know that Shri Tarapore has moved away from the commandingheights from banking problems to form a macro perspective and instead discussedat length, the various steps put in place to ensure that rights of small customers aresafeguarded. In this connection, he appreciates many achievements of Dr. Y. V. Reddy,October - December 2011The Journal of Indian Institute of Banking & Finance

BOOK REVIEWspecial featurespecial featurewho during his Governorship took concrete actions to ensure that small customersare provided their legitimate dues in a historical context. Shri Tarapore deals withexternal issues and he is a supporter of the RBI's exchange rate management and hedoes not agree with critics who argue for free trade for the exchange rate. He is indeedcritical of the gold policy followed by the RBI. According to him, the country is losingheavily because of the passive policy on gold, both in terms of the official reserves andalso from the view point of the individual holder of gold. There was in the past, a proposalto start a Gold Bank in 1992 as announced in the Budget of 1992 but this proposalwas ultimately given up. Shri Tarapore is a strong supporter for the establishment of agold bank.Shri Tarapore has dealt with all the issues of monetary policies, inflation control,capital flow very effectively and logically. The book is therefore, indeed a good guidefor the students who want to understand financial policies followed, particularly by theRBI. The book is indeed full of deep insights, elucidates scholarship, originality andlogical rigour written with the lucidity of expression. This book is therefore, useful not onlyto the students of economics but also to the policy makers in the RBI and Government.The research scholars in economics will indeed stand to benefit from the study of thisbook.The Journal of Indian Institute of Banking & Finance October - December 2011 61

special featureBOOK REVIEW62Name of Book : Brick by Red BrickAuthor : Prof. T. T. Ram MohanPublisher : Rupa Publications India Pvt. Ltd., New DelhiPrice : ` 495/-Pages : 281Reviewed by : P. Bala Chandran, Director of Academic Affairs, IIBF, MumbaiThe book under review by Prof. Ram Mohan attempts to recapture the life and times of oneof the directors of IIMA - Ravi Matthai. The book also deals at length about the genesis ofIIMs in India and the role played by the Government of India, State Governments, Industrialists,HBS and some of the political bigwigs of that time. It brings about the circumstances underwhich the first two IIMs came to be established in Kolkata and Ahmedabad instead of atNew Delhi and Mumbai. Very interesting to go through at this distant point of time.Needless to say that every institution-like individuals - will have a story to tell. Very often thefacts do not come to the fore, as many feel that they do not serve any purpose after a lapseof time. Hence very many internal aspects are not known and thereby many learning pointsare missed, leading to re-invention of wheel on many occasions.That is where the book scores. It gives the inside story, very painstakingly brought aboutby going through the IIM records, minutes, discussions with people then involved andextensive research into the archives. Normally, a busy professor of a leading IIM maynot make such an attempt / effort, when they could concentrate on many other pressingcontemporary themes of commercial interest. But then Prof. Ram Mohan, it appears, hada specific goal to bring to the fore the contributions of late Ravi Mathai and he wanted toplace before the public the yeoman contribution of Mathai for the growth and developmentof management education in general and IIMA in particular. For this noble gesture, the authordeserves full appreciation.The book very candidly states that Prof. Mathai came to the IIMA without much academiccredentials and was virtually a new comer to the field and the post he held. This hadcreated some teething problems to him in the initial years, but then he overcame all thoseshortcomings and came out triumphant at the end earning the respect of his peers, boardof the IIMs, HBS professors, the faculty at the campus and students alike. In all this, probablyhis elitist background, early education, exposure in UK etc might have played a great role.But more than that, what one could gather is his manner of dealings , use of the head andheart in managing the affairs of the Institute, style of conducting meetings, simplicity inliving, non aggressive demeanor and the concern for the people at the campus andelsewhere which endeared him to those with whom he came in contact. This is amplyrecorded from the interviews with stalwarts like late C. K. Prahlad to cite just one reference.Just as Mathai's appointment as the director of the IIMA, at the rather young age of 38years, was a great surprise to those involved at that time, his sudden relinquishment ofthe directorship at 45 years, was a greater shock to his colleagues. That must have beena very bold decision for any one when there was no apparent operational compulsion toOctober - December 2011The Journal of Indian Institute of Banking & Finance

BOOK REVIEWspecial featurespecial featuredo so. In today's era of job hopping for greener pastures, one may not be surprisedby Mathai's action. But this event is really intriguing as Mathai continued to work as aprofessor in IIMA, without going for any other assignment outside, till his untimely demiseat the age of 57 years.It is also interesting to note the amount of time he spent to travel to distant Rajastanvillages by road, time after time - under failing health, to spread financial literacy, undertakeeconomic upliftment schemes / studies etc., under the Jawaja project, knowing pretty wellthat substantive outcomes may not come out of such dedicated efforts. In the currentera of financial inclusion / literacy, inclusive growth etc, the pioneering efforts of Ravi Mathaiwill have much to contribute, if anyone cares to wade through those early studies / outcome.The following quote of the author succinctly captures Ravi Mathai, the man - “With peoplein high office, one assumes certain things. They are in it for the money -- they like toproject themselves at every turn, they enjoy the power that goes with the office and, alltoo often, they view their current office as a launching pad for a bigger and more lucrativeone. Matthai just didn't seem to care for any of these things. His was a state of not wanting,that ordinary mortals would almost find impossible to relate to. He didn't seem to wantanything for himself, he was simply delighted in building the institution, in watching peoplegrow and flower. He practiced the Gita ideal of nishkam karma (action done withoutexpectation of reward) without ever preaching it. (236)” Coming these words from a currentIIMA professor is a great tribute to an exalted soul of the past. How many people of the daycan hope to get such exemplary remarks after their time is anybody's guess.There are many interesting and learning points which the reader is invited to readand understand first hand. It is felt that the book should be read by all the managementstudents in general and IIMA students in particular. The book is a must read for thedirectors of academic institutions and people dealing with academic affairs in the countryto understand the peculiarities involved in dealing with highly educated faculty and thespecial care needed to nurture, blossom and retain them.I would like to end the review again with a quote from the book. “No national honourscame the way of this pioneer in management education. --- Men like Matthai need none.The institution that he helped build - brick by red brick - and that is hailed as a centreof excellence is a greater tribute to him than any award that anybody could confer. In theinitial decades after Independence, India was fortunate in having institution-builders ofthe highest caliber. Nehru showed the way by building the institutions of democracy. Thenwe had the likes of Homi Bhabha, Vikram Sarabhai, J. R. D. Tata, V. K. R. V. Rao andR. K. Talwar. In that constellation of institution-builders, Ravi Matthai shines brightly.”(254) Great words and observations indeed that one can hope to see / read / write aboutany one. A must read for institution builders of present and the future.The Journal of Indian Institute of Banking & Finance October - December 2011 63

special featureBooks Added to the IIBF Corporate LibraryNo. Title Author Publisher & Year of Publication1. Asian Juggernaut : the Rise of China, India & Japan Brahma Chellaney Harper Business, 20102. 30 Day MBA in Marketing Colin Barrow Kogan Page, 2011nd3. 30 Day MBA, 2 edition Colin Barrow Kogan Page, 20114. Social Intelligence : the New Scienceof Human Relationships Daniel Goleman Arrow Books, 20075. Predictable Magic : Unleash the Power of Design Deepa Prahalad &Strategy to Transform your Business Ravi Sawhney Dorling Kindersley (India), 20116. Winning Negotiations Harvard Business Review Harvard Business School, 20117. Rise of the Global Nomad : how to Manage the New Jim Matthewman Kogan Page, 2011Professional in order to Gain Recovery & MaximizeFuture Growth8.ndBasics of Banking & Finance, 2 edition K. M. Bhattacharya & Himalaya Publishing, 2011O. P. Agarwal9. Bankers’ Beacon : the Story of Union Bank of India M. V. Kamath Union Bank of India, 201010. Authentic Happiness : using the New Positive Martin E. P. Seligman Nicolas Brealey Publishing, 2010Psychology to Realize your Potential forDeep Fulfillment11. Most Successful Small Business in the World : Michael E. Gerber John Wiley & Sons, 2010the Ten Principles12. India’s New Development Agenda : Building N. A. Mujumdar Academic Foundation, 2011a Value - based Society13. Business Decision Making Pippa Riley Viva Books, 201114. Business Environment Pippa Riley Viva Books, 201115. Business Maths Pippa Riley Viva Books, 201116. Business Strategy Pippa Riley Viva Books, 201117. Finance : Management Accounting & Financial Pippa Riley Viva Books, 2011Reporting18. Human Resource Development & Employee Pippa Riley Viva Books, 2011Relations19. Human Resource Management Pippa Riley Viva Books, 201120. Management : Communications & Achieving Pippa Riley Viva Books, 2011Results21. Management : Leading People & Professional Pippa Riley Viva Books, 2011Development22. Organizations & Behaviour Pippa Riley Viva Books, 201123. I have a Dream : the Inspiring Stories of 20 SocialEntrepreneurs who found ways to Solve Old Problems Rashmi Bansal Westland, 201124. Confidence at Work : Get it, Feel it, Keep it Ros Taylor Kogan Page, 201125. Bold : How to be rave in Business & Win Shaun Smith & Kogan Page, 2011Andy Milligan64October - December 2011The Journal of Indian Institute of Banking & Finance

Registered with the Registrar of Newspapers for India under No. R. N. 6073 / 57