Market globalization
With globalisation and development of technology, the oldest sector - banking has been restructured. It has become a highly competitive industry with each bank trying to offer best and most efficient services to the customer as it has become a buyer's market. Banking is not only restricted to core businesses of deposits and lending but there are many new verticals like wealth management, plethora of products to choose from like insurance, mutual funds, online trading and therefore it is a very complex and deep sector now. With globalisation, customers have exposure to the best practices and services and therefore they are not ready to settle for any less. (Alatas and Roy, 2005)
2. Drivers of globalization using Yip's model
Globalization implies the free movement of goods, services and capital throughout the world. It involves the opening up of national economies to global markets. As the world started opening up, companies from all industries started looking for potential avenues in foreign land and banking was no different. Foreign banks entered developing nations and provided them with more advanced and convenient ways to manage their money. (Berger, Dai, Ongena and Smith, 2002)
2.1 Market Globalization:
As economies started to open up, some sooner (US and UK) and some later (like India), banks across the world saw it as an opportunity to expand their customer base. In 1990s developing nations started to open up to international companies to come and do business in their country.
That was the time when markets in developed world was reaching saturation and therefore companies started looking for potential markets abroad. Banking is a very old industry, everyone who needs money management, had a bank but the challenge for foreign banks was how to move customers from their existing local banks to employ their services. Nevertheless, with globalisation, world had become one single marketplace for business. (Berger, Dai, Ongena and Smith, 2002)
2.2 Cost Globalization:
Advancements in technology if communication, information and transportation resulted in reduced costs of transporting goods and services, and facilitated free flow of information. Newer delivery methods for customer services, such as Internet banking, phone centres, and ATMs, exhibited greater economies of scale than traditional branching networks. Also advances in payments technology created scale economies in back office operations and network economies.
(Source: http://india.smetoolkit.org/india/en/content/en/36639/Impact of Globalisation on Banking Services in India Adv Rupali Sagar)
2.3 Globalization of Government Policies:
The middle and late 90s witnessed many governments slowly opening up their protected markets to outside competition. These reforms led to restructuring, convergence and globalization. In banking sector as well, deregulation was starting to take place at various levels in different countries. This also led to wave of consolidation in the banking industry as banks were trying to gain foothold in new market by partnering with local player. The degree of globalization depended hugely on government policies like China's banking sector remained protected for longer period and therefore entry of foreign banks got delayed. A recent regulatory changes affecting the U.S. financial industry would be Financial services Modernization Act in US which allows the operation of commercial banking, investment banking, and insurance underwriting within the same holding company. Such regulatory changes continue to have a significant impact on the market structure of the banking industry.
(Source: http://www.fdic.gov/bank/analytical/banking/2006jan/article2/index.html )
2.4 Globalisation of Competition:
As the economies started opening up and governments stopped protecting their local banks, world became a level playing field with survival of the fittest. Increased competition led banks to offer the best possible services in the most efficient way. So much so that banks have now become sales houses. They employ people to sell their credit cards, give loans to people and there is lot of cross selling in banks since they deal with wide array of products. Competition made traditional banks come out of their cocoon and turn to more efficient ways to service people.
(Source: www.chicagofed.org/publications/economicperspectives/2001/2qepart4.pdf )
3. Countervailing Factors:
Whenever a foreign bank enters a new region, there is bound to be resistance from local players. There is no doubt that competition always keeps businesses on toes though is always benefits the customer as all companies try to offer the best service to remain in business. Banking industry is no different, when foreign banks entered developing countries like India, they brought with them bouquet of products apart from core banking which forced banks to come out of their comfort zone and offer world class facilities to customers like ATM, online banking, credit cards, debit cards. But there are various factors due to which many people trust local banks than international as banks deal with a very sensitive product - people's money. (Berger, Dai, Ongena and Smith, 2002)
Foreign banks dealing with local money are seen as foreign control of local economy by conservationists. There is a fear that it would lead to financial colonialism and therefore foreign participation in local economy should be discouraged. This is although not a logical fear as foreign bank entry is just an FDI in financial services sector of the nation. Also it will not lead to capital flight as is feared by most people. Banking is a services industry and foreign banks merely service local customers, what they are selling is just the financial services in the host country. These are more often than not arguments to protect inefficient local industries. But once the customer is exposed to better service and convenient platforms like online platform, local banks have to sooner or later provide these as the customer would switch to other banks. There is one factor that is in favour of local banks in economies which have remained protected for a long time and that is the trust and long relationship developed by customers with their respective banks. There is no substitute for that and no matter how convenient it might be to switch over, it is difficult for some people to leave the bank they have dealt with since they started dealing with money. (Berger, Dai, Ongena and Smith, 2002)
4. PESTLE Analysis of Banking Industry:
Political Factor: Political environment of any country have direct impact on banking industry, which became more apparent in the recent bail outs rolled out by governments in Europe, US for the banks under pressure owing to recession and bad financial markets. In some democracies like India, government declares some measures to attract farmers' votes during elections like waiver of short term agricultural loans, which directly affects the profits of the bank get affected. Various banks in the cooperative sector are open and run by the politicians. They exploit these banks for their benefits. Sometimes the government appoints various chairmen of the banks and these are not on the basis of capability but relations. This kind of bureaucratic set up is rampant in countries like China.
(Source: http://www.fdic.gov/bank/analytical/banking/2005nov/article1.html)
Economic Factor: The nation's economy, in which the bank is operating is a very important factor. If economy is doing well, strong domestic consumption and investment drivers will continue to support healthy rates of growth. Increasing household incomes & consumption, significant industrial & infrastructure investment potential in growing economies present huge opportunities to banks. These financial services needs of a growing economy is the reason why many international banks are entering countries like India and China despite their stringent and complex regulatory environment. On the other hand financial market panics, natural disasters, acts of terrorism, war, and even changes to policy like FDI limit are various factors which decelerate the rate of growth of economy and eventually banking sector in any nation. The impact of economic crisis is that money market removes another key source of short term bank funding and puts the banks under even more pressure for a shorter or longer term depending on the intensity of such mishaps. (Chris and Ahmed, 2009)
(Source: http://www.fdic.gov/bank/analytical/fyi/2006/032306fyi.html and www.icici.com (Annual Report 2008) )
Social Factor: Because customer is unit of society so how banking firm develops relationship with customers has the direct impact on social image of banks. These customers come from all walks of life, they have different requirements and financial capacities depending on their age, income, gender etc. Banks have to cater to all - they have to take care of economically weaker section of the society and also provide need based finance to all the sectors of the economy with flexible and liberal attitude. Different products are designed and marketed to provide loans to farmers, working women, professionals, and traders. Also there are education loans to the students and housing loans, consumer loans, etc to working class.
Source: http://www.fdic.gov/bank/analytical/banking/2006jan/article2/index.html
Technological Factor: Technology has changed the very face of banking. Information Technology to be more specific has transformed the way banking industry works. Advancements in technology and developments like Mobile Automated Teller Machines (ATMs), Multifunctional ATMs shared ATM services, Core Banking Systems (CBS), Internet Banking, Mobile Banking and Large scale usage of Real Time Gross Settlement (RTGS) have made banking so convenient and easier than in the past, when for every transaction, customer had to be physically present at the branch of the bank. These advancements have made possible exchange of capital across borders so quick and so convenient. This has been a major factor for enabling foreign banks to enter new lands. These are not also easy ways to transact but also more efficient, also aid in risk management practices of banks.
(Source: www.eds.com/industries/banking/downloads/bankingoverview.pdf)
Legal Factor: Bank confidentiality or security of customer's account details has been a sensitive topic. Governments make attempts to obtain details of undeclared income of their citizens out of the country. Banks in Switzerland and Liechtenstein have been involved in such cases quite frequently. There is a conflict of interest where the government has the right to maximize its revenues and an individual has the right to privacy for his financial affairs. Recently for example a programme was initiated by the US Treasury through a worldwide system to track international payments to identify and confiscate terrorist funds. But such measures can cause tensions between two nations like in this case US and EU. But banks are just caught in between a dispute which is not their direct concern. Also a strong legal system should be place to ensure justice to foreign banks when they enter alien nation as it would be the concern of any business irrespective of industry.
(Source: http://www.twobirds.com/English/News/Articles/Pages/Tax_terrorism_and _bank_confidentiality.aspx )
6. Indian Banking Industry Overview
Indian Banking Industry is very unique and the dynamics are different from all other economies owing to India's unique geographic, social, and economic characteristics. It has a huge population, income disparities, cultural diversity which is not seen anywhere else. The country's economic policy framework has the features of both socialistic and capitalistic with a heavy inclination towards public sector investment.
Indian banks have to comply with high reserve requirements (30 %), which 30% of their balance sheet guaranteed by the government. These high reserve requirements acted as a blessing in disguise during the recent credit crisis. Unlike the European and US banks, Indian Banks are less leveraged and also relatively better capitalized. Also, there is lesser exposure to the toxic and complex assets. The off balance sheet exposure is also highly concentrated towards forex swaps rather than the Mortgage backed securities.
Source: http://reports.celent.com/PressReleases/200712112/IndianBanking.htm
At the macro level, if we see Indian Banks' profitability would remain under pressure due to following reasons although Indian Banking Industry had been relatively insulated by the recent recession.
7. ICICI Bank overview:
ICICI Bank is diversified financial services company that provides a range of banking and financial services to customers, including retail banking, project and corporate finance, working capital finance, insurance, venture capital and private equity, investment banking, broking, and treasury products and services. ICICI Bank is the leading private sector bank in India. It is India's second largest bank by total assets, with a network of over 1308 branches and offices, and over 3950 ATMs only behind State Bank of India (a public sector bank). 3,997.95 billion (US$ 100 billion) at March 31, 2008 As of March 2006, of INR 2,772.3 billion (approximately $62.3 billion) reflecting its large scale of operations. (Source: www.icicibank.com)
7.1 CAMEL Analysis:
On the back of prevailing economic conditions there is expected to be a change in banking sector. They would need to focus more on core banking activities retail liabilities and expanding branch network to gear for the next level of growth given the subdued capital markets and regulatory overhang.
CAMELS (Capital, Asset quality, Management, Earnings quality, Liquidity and Sensitivity to market risk) is a supervisory rating used in the US to measure a bank's overall performance. It is also actively used by RBI for annual on site inspection of banks. This framework was also used by the US government in response to the global financial crisis of 2008.
To evaluate from investor or customer point of view, CAMEL framework is used which is adjusted a little. L stands for liability franchise instead of liquidity because of lack of data in public domain and sensitivity to market risk is ignored.
ICICI Bank scores low on CAMEL. This is mainly due to poor asset quality, weak liability franchise (bank is increasingly focusing on improving its funding mix but the same comes with execution risk) and management reshuffle, which would keep the bank in adjustment mode. However, higher capital comes as a comforting factor in a stressful environment, but again excessive capital remains a drag on RoE. (Centrum Research, 2009)
7.2 SWOT Analysis:
(Please see Appendix 2)
8. Conclusion:
Banking sector has been completely transformed by advancements in technology and introduction of internet. Banks have moved from routine core banking activities to other value added products like mutual funds, online trading, insurance, credit cards which increases their revenue bases also but makes the industry highly competitive. Globalisation has made world a common market for all to explore again intensifying competition. Recent recession and financial market crisis hit the world bad but Indian banks were somewhat insulated owing to strict regulatory framework in the country. ICICI continues to be one of India's top banks sitting on huge capital. But since it is testing time for the economy, ICICI also has to manage certain issues like management reshuffle, rebalancing loan mix and then with markets getting better, it is poised to grow with the growth.
9. References
- Alatas,A., Roy, J.S.,2005,An imperfect country of Great Consequence" [Available at ] http://www.wilsoncenter.org/topics/pubs/AsiaReport_No127.pdf[Accessed on 16 August 2009]
- Berber, A. N, and DeYoung, R. (2006): Journal of Money, Credit and Banking
- Berger,A, Dai,Q., Ongena and Smith D.C., 2002,TO WHAT EXTENT WILL THE BANKING INDUSTRY BE GLOBALIZED? A STUDY OF BANK NATIONALITY AND REACH IN 20 EUROPEAN NATIONS [Available at] http://www.federalreserve.gov/pubs/ifdp/2002/725/ifdp725.pdf [Accessed on 17 August 2009]
- Centrum Research(2009): Banking Sector
- Clarke, G. and Cull, R. (2003): Foreign Bank Entry: Experience, Implications for Developing Economies, and Agenda for Further Research
- Chris,M. and Ahmed,S., 2009 UK Housing Market shows signs of life [Available at]http://www.rgemonitor.com/economonitor monitor/257546/uk_housing_market shows_signs_ of_life [Accessed on 15 august, 2009]
- Dinger, V. (2000): The case study of vertically Non integrate, Bank Market liberalization, Market Structure and Profitability 8. Investopedia,
- Investopedia, 2009, [Availabble at] http://www.investopedia.com/features/industry handbook/banking.asp [Accessed on 10 August, 2009]
- Johnson, G Scholes, K. & Whittington, R (2009) Exploring Corporate Strategy 8th edition
- Musa, M.(2000): Global opportunities and challenges
- Wheelen, T. L.(2002): Concepts in Strategic Management and Business Policy
Websites Used
www.business.com
www.datamonitor.com
www.mintel.com
www.forex.com
http://search.msn.com/results.aspx?srch=105&FORM=IE7RE&q=contevailling+factors+in+banking+industry
http://www.fdic.gov/bank/index.html
www.chicagofed.org/publications/economicperspectives/2001/2qepart4.pdf
http://www.researchandmarkets.com/reportinfo.asp?report_id=302879
http://search.msn.com/results.aspx?srch=105&FORM=IE7RE&q=icici+bank
http://www.icicibank.com/
http://www.icicibank.com/pfsuser/aboutus/overview/overview.htm
http://www.cio.co.uk/news/index.cfm?RSS&ArticleID=3170
http://www.researchandmarkets.com/reports/c92427
http://www.coursework4you.co.uk/C_B_164_UK_RETAIL_BANKING_PESTLE_AND_PORTERS_FIVE_FORCES_ANALYSES.html
http://www.fdic.gov/bank/analytical/banking/2006jan/article2/index.html
http://www.fdic.gov/bank/analytical/banking/2005nov/article1.html
http://india.smetoolkit.org/india/en/content/en/36639/Impact of Globalisation on Banking Services in India Adv Rupali Sagar
http://www.twobirds.com/English/News/Articles/Pages/Tax_terrorism_and_bank_confidentiality.aspx
10. Appendices
Appendix 1
Porter's 5 Forces Model
5.1 Threat of New Entrants: Banking is one industry where there is a minimal chance of a new entrant significantly affecting a major player's market share. One area where there could be some kind of threat is internet banking services which major entrepreneurs can try to capitalize. For example telecom operators can soon start the facility of paying bills online. (Cetorelli & Strahan, 2003)
5.2 Power of Suppliers: The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. If a talented individual is working in a smaller regional bank, there is the chance that person will be enticed away by bigger banks, investment firms, etc. . (Cetorelli & Strahan, 2003)
5.3 Power of Buyers: There is great power in the customers' hands in this highly competitive world. Customers want the best services and facilities from banks or otherwise there are very low switching costs. Nowadays, banks lure potential customers to open an account with them, use their credit card, take personal loans from them just to start relationship in any form with them. But the banks have to be very vigilant these days about the various schemes competitors come out with. It is common to see people carrying credit cards of multiple banks, holding accounts in many banks. They use whichever comes out with a better scheme at that point in time and therefore banks have to be on their toes to generate business. . (Cetorelli & Strahan, 2003)
5.4 Availability of Substitutes: There are no substitutes of core banking operations of a banks but in certain areas there are alternatives cropping up e.g companies like Ford offer preferred financing to customers. But there are areas like deposits, safe lockers where there is no substitute possible and these are the reasons why banking is one of the oldest industries. . (Cetorelli & Strahan, 2003)
5.5 Competitive Rivalry: The banking industry is highly competitive. It is not a new concept, financial services industry has existed for forever and everyone who needs a banking service is a customer of a bank. Banks try to lure customers from competing banks by offering lower financing, preferred rates and investment services. This competition sometimes eats the profit of banks and can cause them to take on high risk projects as well. Competition is always good for the customer but bad for profitability of firms. This is one of the reasons for consolidation in the banking industry. The reason behind these mergers would be to put capital to better use and increase their standing and power. The industry continues to restructure and position and there have been many mega mergers in recent years e.g Citicorp and Travelers Insurance merged in 1998, Bank of America and Nation's Bank also agreed to merge shortly afterwards which became the largest bank in the United States. Bank mergers also happen to compete with non bank financial services providers.
(Sources: www.forex.com & www.fdic.gov/bank/analytical/fyi/2006/032306fyi.html )
Appendix 2
SWOT Analysis of ICICI Bank
Strengths:
1) Brand Name: ICICI Bank has earned a reputation in the market for extending quality services to the market vis a vis its competitors. It has earned a strong Brand name in banking in a very short span of time
2) Strong Capital Base: ICICI has a very strong capital base, which is very important in an environment of possible deterioration in credit quality.
3) Market Share: ICICI Bank has the largest market share of 34% in the IT & ITES industry in Hyderabad according to our survey (within the limitation of the sample size.)
4) Huge Network: ICICI Bank has the highest number of linked branches in the country. The bank operates through a network of 450 branches and over 1800 ATMs across India, thus enabling them to serve customer in better way
5) Diversified Portfolio: ICICI Bank has a variety of products under its belt to offer its customer.
(www.icici.com, 2009)
Weakness
1) Loan Mix: ICICI is in the process of improving the funding mix to reduce dependence on wholesale funding
2) Little Presence Outside India: The growth in ICICI Bank's international book is also expected to remain sluggish due to lack of demand by Indian corporate for international loans
3) Poor Customer Care/Service: With its aggressive marketing ICICI Bank is rapidly increasing its customer base. They are not however, increasing the number of employees accordingly. This is leading to deterioration of the standard of customer service.
4) Management Reshuffle in progress: Appointment of Ms. Kochchar as MD & CEO, Mr. Kamath as Non Executive Chairman, Mr. Vaidyanathan as MD & CEO ICICI Pru Life, Mr. Bhargavdas Gupta as MD & CEO ICICI Lombard. This creates some instability in near term
Opportunities
- New IT & ITES Companies: IT & ITES sector is on a boom in the Indian market context, with new companies mushrooming in the market; it opens the door for ICICI bank to capture the huge untapped market.
- Dissatisfied Customers of Other Banks: The group from its survey and analysis of IT companies have found out that there are many companies which are not satisfied with its current bank, so ICICI with its superior service quality and long working hours can capture those customers.
- Remittances: ICICI bank has very little presence as far as the EEFC account is concerned.
www.managementparadise.com/forums/...php/t 85241.html
Threats
- 1) Advent of MNC banks: Large numbers of MNC banks are mushrooming in the Indian market due to the friendly policies adopted by the government. This can increase the level of competition and prove a potential threat for the market share of ICICI bank.
- 2) Dissatisfied Customers: Poor customer support is creating a lot of dissatisfaction among the customers, this can prove to be a serious problem as far as the market reputation of the bank
- 3) Ever improving nationalized banks: With PSU banks like SBI going all out to compete with the private banks and government giving them a free hand to do so, it can prove to be serious threat for banks like ICICI.
(Source: www.icicibank.com and Centrum Research(2009): Banking Sector)
