India's Banks Gear Up for the Global Market

Allen says that "the big banks across the world seem to have a problem with customer satisfaction," and he raises some fundamental issues here. "If you make a mistake like bouncing a check, the bank charges you a high [penalty] price; that may get people upset with them," he says. "On the other hand, they provide a lot of services for free, such as when you use your own bank's ATM or when they process the checks you write. If they charge you for those services, it may get people even more upset."

It isn't easy to determine what drives customer satisfaction while banks try to stay both competitive and profitable, says Allen. "They have to make money somehow, and it is interesting the way they do it. The question is whether the way they do it is actually the best. Maybe the way they do it -- subsidize a lot of services and make it up somewhere else -- is the best way."

According to Sengupta, McKinsey's research reveals that the corporate customers of Indian banks tend to be less forgiving about inferior customer service than individuals. "For the corporate customer, the ability to access funding overseas at a relatively cheaper rate very quickly and conveniently is a big dimension, besides access to innovative products and best-in-class risk-management systems," he says.

However, the leading Indian banks are able to meet those requirements for the top-tier corporations, he adds. "The challenge Indian banks face is in the next tier -- the slightly smaller corporations -- for whom they need to provide the same level of service and range of products."

Although Indian banks look good in select areas vs. their global peers, they are relatively small, says Sengupta. But India's economic growth and the banking industry's efforts to meet global standards will change that picture dramatically in a decade, he notes.

"Five years ago, no Indian bank had a market capitalization of more than $5 billion or $6 billion. Today, you have at least two banks (the State Bank of India (no ADR ) and ICICI Bank(IBN Quote)) with market caps of $30 billion to $40 billion. Roll the clock forward 10 years, and you can easily see that crossing $100 billion to $150 billion, and at least two or three truly global banks emerging from India."

ICICI Bank, Housing Development Finance Corp. (no ADR) and HDFC Bank (HDB Quote) are the current top bank/financial sector holdings in Blackstone's (BX Quote) India Fund (IFN Quote) and Barclays' (BCS Quote) iPath MSCI India Index ETN (INP Quote).