India's Banks Gear Up for the Global Market

On the measure of "credit and risk best practices," Indian banks fare well against their global peers, although incumbent banks fall short, the report says. This measure covers banks' performance on credit underwriting , rating , risk-based pricing, credit portfolio management and credit monitoring. On a scale of 0 to 4, McKinsey gives Indian attacker banks the top score of 3.3, while the top global banks average 3.2 and Asian banks average 3.1.

India's incumbent banks manage a score of just 2.8 on that scale of credit and risk best practices. "On the whole, they lack advanced early warning systems and use only basic funds transfer pricing methodologies to conform to regulatory and compliance measures," the report says.

McKinsey's surveys also reveal that Indian banks have done better than their global peers in organizational performance, "given their historic access to superior talent." The report also puts Indian banks ahead of their Asian counterparts in "distribution efficiency," while both share equal scores in "marketing and sales." Asian banks and the top 10 global banks do better than their Indian counterparts in corporate leadership, IT capabilities and credit skills. However, the Indian attacker banks are ahead of the incumbents on all fronts, including what McKinsey calls "corporate leadership."

Technology and Performance

In using technology to shore up their performance, the best banks in India (including five leading private and foreign banks operating in the country) "are among the most efficient in the world," the McKinsey report says. In one specific measure of IT spending per 1,000 accounts, the "best Indian banks" spent an average $10.2 in 2007, while European banks averaged $76, the firm notes.

The Indian attacker banks with "best-in-class" IT capabilities "are truly the best in the world," McKinsey adds, identifying three factors driving this trend: "the ability to avoid using legacy systems, superior governance practices that often entail direct CEO involvement and the India advantage [a reference to the country's established IT skill base]."

Sengupta says that while incumbent banks have been relatively slower to embrace IT and other technology, they will still derive advantages on that front. "In an ironic way, they are able to leapfrog as they have been later adopters of technology," he says.

On customer satisfaction, which McKinsey rates as "the biggest driver of value," the report says the attacker banks have "revolutionized levels of convenience and provide customers with superior service." At the same time, the attacker firms also have "more customers with negative experiences" than the incumbents. "Customer experience and tailored offerings will be a big driver of bank profitability, as young, affluent customers are more demanding and discerning and are less credit-averse."

"That is scary for the incumbent banks," says Chakrabarti. He adds that while the incumbent banks fare as well as the attacker banks on profitability measures, they are unable to win over the younger, upper middle class group of customers that is commonly referred to as the "mass affluent." India's mass affluent class is heading towards private banks and foreign banks, driven mainly by customer service needs, he notes.

"That is where your cheap deposits will come from, and those are the people who will use your banking services and to whom you can sell your insurance products and other fee-based services," says Chakrabarti. "That is the customer service [the incumbent banks] want to hold on to, to maintain your profitability."