HR Issues and Challenges in Indian Banking Sector

HR ISSUES AND CHALLENGES IN INDIAN BANKING SECTOR Dr. P.Jyothi Faculty School of Management Studies University of Hyderabad, Gachibowli, Hyderabad – 500 046. Andhra Pradesh, India. E-mail: [email protected] Ms. V. Sree Jyothi Research Scholar School of Management Studies University of Hyderabad, Gachibowli, Hyderabad – 500 046. Andhra Pradesh, India. E-mail: [email protected] HR Issues and Challenges in Indian Banking Sector Abstract Over the last three decades, there has been a remarkable increase in the size, spread and activities of banks in India. The number of bank branches rose considerably during this period. The business profile of banks has transformed dramatically to include nontraditional activities like merchant banking, mutual funds, new financial services and products and the human resource development. Change is the only constant factor in this dynamic world and banking is not an exception. The changes staring in the face of bankers relates to the fundamental way of banking-which is undergoing rapid transformation in the world of today. The major challenge faced by banks today is to protect the falling margins due to the impact of competition. Another significant impact of banks today is the use of technology. There is an imperative need for not mere technology up gradation but also its integration with the general way of functioning of banks. All this is possible with the help of efficient human resource management. However, the challenges faced in the HR front are numerous and need to be handled diligently. The present paper attempts to identify few HR challenges in the Indian Banking Context and suggests mechanisms to handle them. HR Issues and Challenges in Indian Banking Sector Introduction Banking Sector in India Since 1991, India has been engaged in banking sector reforms aimed at increasing the profitability and efficiency of the 27 public-sector banks that controlled about 90% of all deposits, assets and credit. There has been radical and perceptible transformation in the operational environment of the banking sector. However, these changes have been induced with a view to develop sound and efficient banking sector in India, at par with international banking standards and practices. The banking sector, which was one of the most protected sector for five decades in the country and more precisely the public sector banks were slowly exposed to deregulated environment in slow and phased manner. The information technology (IT) revolution is entirely changing the way banking business is done and has considerably widened the rage of products and services as well as the demands and expectations of customers. Risk Management, Asset Liability Management, Product and Service Innovation, Securitization, Relationship Banking Environment Management are some of the current buzz words in the banking scene. There have been few important developments in response to change forces necessitating the learning phenomenon for the banks. Some of the issues in the banking sector are :responding to intense competition, changing customer profile, increasing role of IT, innovation, profit orientation aspects etc. These developments have implications not only for present but also for the future in terms of operational aspects. The qualitative aspects of change include prudential norms like asset classification, provisioning capital adequacy, risk management requirements, transparency, corporate governance, changing regulatory supervisory systems etc. Banking system remains the focal point in the financial set-up of country and more so in the context of a developing country like India. There is importance attached to the banking system, in view of their financial intermediary role in payment system. The banking sector is dominated by scheduled commercial banks (SCBs). According to a report by ICRA limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. 2006-2007 was marked by surplus liquidity, slowly rising interest rates, good credit growth, good returns, mergers and status quo on reforms. In banking sector a minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%(1997). At the end-march 2006 despite tightening of prudential norms Capital Adequacy Ratio (%) of the banking sector has increased from 10.4% to 12.8%. The government has sought to lower its holding in Public sector banks to a minimum of 33 per cent of total capital by allowing them to raise capital from the market. Bank credit has increased sharply from 30% of GDP at end march 2000 to 48% at end march 2006. Less than 40% of Indian household has a bank account. The banking industry caters to the following broad categories of products/services: i) Retail Banking ii) Retail products such as credit cards, debit cards etc. iii) Portfolio Management: Mutual Funds etc. iv) Corporate lending and project financing (including loans) v) Investment banking vi) Foreign exchange trading All of these areas have attracted substantial foreign interest in the event of the opening up of the Indian economy. The new private sector banks have witnessed the highest growth in assets at 43.2 per cent during 2005-2006 followed by foreign banks which have grown at 31.2 percent, while public sector banks (PSBs) have reported a 13.6 percent growth during the period, the Reserve Bank of India (RBI) said in its report on Trends and Progress of Banking in India, 2005-2006. Public sector banks have been unable to match asset growth of foreign banks and new private sectors during 2005-2006., due to forced liquidation of government securities to meet high credit demand, the report said. There are Some areas that need to be geared up for future growth, identified by the survey respondents are: diversification of markets beyond big cities (84.2%), HR Systems (63.15%), Size of banks (52.63%), High Transaction Costs (47.3%), Banking Infrastructure (42%), and Labour Inflexibilities (42%). India’s banking sector is growing at a fast pace. India has become one of the most preferred banking destinations in the world. The reasons are numerous: the economy is growing at a rate of 8%, Bank credit is growing at 30% per annum and there is an ever-expanding middle class of between 250 and 300 million people in need of financial services. All this enables double-digit returns on most asset classes which is not so in a majority of other countries. Indian markets provide growth opportunities, which are unlikely to be matched by the mature banking markets around the world. Some of the high growth potential areas to be looked at are: the market for consumer finance stands at about 2%-3% of GDP, compared with 25% in some European markets the retail credit is expected to cross Rs 5,70,000 crore by 2010 from the current level of Rs 1,89,000 crore in 2004-05 and huge SME sector which contributes significantly to India’s GDP. The Indian banking sector has scored over its counterparts not only in developing but even in developed world such as Japan, Singapore and Australia on significant parameters. According to Moody’s Investors Services data, Indian lenders have posted highest ROE of 20.38% (system average of three years), closely followed by Indonesia at 20.19% and New Zealand 18.83%. Japan, the biggest economy in Asia posted negative returns of 6.42%, implying that the banks there made losses. Banks of Philippines and Australia have posted an ROE of just 4.40% and 11.44% respectively. In this market driven economy, a level playing field is required for PSU banks to compete with new private sector and foreign banks. Banks are setting up alternative delivery channels to contain operating costs like off-site ATMs, internet banking, telebanking, outsourcing; Technology has become the key driver for enriching CRM and reduction of operating costs. Developing foresight in anticipating changing risk-return relationships, pricing bank’s products appropriately by putting in place efficient asset-liability management, and enhancing technical skills to operate modern technology are essential for banks to face the market challenges. The development of the Indian banking system depends on the development of its human resources and its challenges; to study the present study has been undertaken. The main Objective of the study is to identify the emerging HR challenges for banks in developing countries, particularly India. OFFICES OF COMMERCIAL BANKS IN INDIA - 2004 TO 2008 As on March 31 Bank Group 2004 2005 2006 2007 2008 (1) (2) (3) (4) (5) State Bank of India and its Associates 13836 13983 14261 14611 15512 Nationalized Banks $ 34492 35042 35754 37227 38726 221 242 14721 14752 5951 6454 6819 7401 8265 27 25 28 33 33 Foreign Banks Regional Rural Banks Other Scheduled Commercial Banks Non-Scheduled Commercial Banks Total 69248 70498 259 272 280 14777 14802 14957 71898 74346 77773 Notes : No. of offices includes administrative offices. $ Includes IDBI Bank Ltd. Data for 2004 to 2007 have been revised and data for 2008 are provisional. Source : Master Office File (latest updated version) on commercial banks, Department of Statistics and Information Management, RBI. Challenges Facing Banking Industry in India The banking industry has already begun the process of redefining its boundaries, refining its products and services, providing alternate delivery channels and improving the flexibility of such delivery to cater to all the financial intermediation requirements of the customers. The success of the banking industry will lie broadly on how it responds to the following challenges:- • Technology up gradation • Customer centric • Response to competition • Transparency/Accountability • Skilled workforce Technology up gradation: Technology brings in fundamental changes not just in product differentiation and delivery but also influences productivity, efficiency and profitability. Technology enables banks to provide better services to the customers where the branch is not necessarily the delivery point of banking services. Customer Centric: Customers are no longer investors or buyers of financial solutions. As service that requires high level of customer interface, understanding customer requirements and evolving customer-centric business strategies is the prime focus area for banks. Response to competition: Competition is inevitable as more number of banks aim for their share of the market pie. Most banks eye the corporate sector and the metro and the urban markets for business. Technology is today the differentiating factor. But as more and more banks come under the Core Banking solutions umbrella, with little to distinguish between the products and services offered by various banks, service and cost alone will be the determining factors in ensuring the profitability and success of the bank. Transparency/Accountability: With the introduction of financial reforms, the Indian Banking Industry has been pushed into the open to achieve international standards of prudential accounting norms for classification of assets, income recognition and loss provisioning. The scope for ensuring openness and transparency in bank management has also been ushered in. corporate governance will determine the way the Board of Directors manage their banks. This will mean that the management will be accountable to the Board and the Board to the stakeholders. Banks will have to adopt the best global practices of accounting norms and reporting. More transparent disclosure norms will ensure that banks resort to selfregulation rather than base their working on regulatory requirements. Skilled workforce: HR practices and training is engaging the immediate attention of banks these days. HRM strategies include managing change, building up a team of committed human capital and improving team work. Knowledge levels are very important and sufficient training should be afforded to the staff. The existing staff will have to upgrade their skills to keep pace with the sweeping changes that are taking place on the technology front in Indian banks. Only this will help in improving the quality of service to the customers as well as justify the investments made in technology and the salaries paid. In this back ground the present paper attempts to explore the HR challenges facing the banking scenario and strategies to deal with them. The human resources of an organization constitutes its entire workforce. Human resource management (HRM) is responsible for selecting and inducting competent people, training them facilitating and motivating them to perform at high levels of efficiency, and providing mechanisms to ensure that they maintain their affiliation with the organization. Human resource management is also an art of developing people and their potentialities for their personal growth and for the growth of the organization. It is a process of bringing people and organizations together to ensure that individual and collective goals are closely aligned. People have always been considered as critical in an organizational set-up. Unlike other resources, such as technology, finance, and materials, which can be purchased human resource is a critical and sensitive element, and it needs to be handled with care. Often, organizations are concerned not only about employee productivity but also about employee commitment and harnessing their potentialities for maximum growth Since people constitute the cornerstone of any organization, HRM assumes central importance in most organizqatio0ns. Any decision or process in an organization must be implemented through its people. In a competitive situation, it is the ingenuity, zeal, enthusiasm, and commitment of its people that makes all the difference for4 an organization. HR Issues/Challenges in Banking: According to the Hudson report (2008) the critical HR challenges are hiring right staff, retaining talent, cutting staff, staff development, salary inflation, external threats, etc.the other challenges are Changing working conditions, re-skilling, compensation etc. Coping with the massive technology adoption programme – change management from employees’ as well as customers’ perspectives. Some of the management concerns are: • Marketing HR services • Human assets • Man-power planning • Talent management • New approach to performance management • How HR can act as the ‘corporate glue’ or ‘organizational conscience’ • Making the most of human capital • Customers- who are they, and what do they want? • Towards a framework for continuous development and learning • Challenges facing HR today – attracting, retaining and motivating talent • Implementing recruitment and resource-based strategies • Where HR fits in the modern central bank • Managing people and linking with technology in banking operations needs to be prioritized. TABLE: SWOT ANALYSIS OF INDIAN BANKS (IN HR CONTEXT) Strengths • • • • Weaknesses High skilled personnel in middle and low • Poor technology infrastructure levels in the banks. • Presence of more number of smaller Aggression towards the development of the banks that would likely to be impacted existing standards adversely. Strong regulatory impact by central bank to all • Poor compensation system banks for implementation • Poor talent management. Presence of intellectual capital to face the change in implementation with good quality Opportunities • Availability of fresh talent to strengthen the bank operations. Threats • Inability to meet additional capital requirements. • Increasing risk manage expertise. • Huge investment in technologies. • Need significant connection among business, • Entrance of foreign banks to capture credit & risk management and information technology talent HR. • Increasing the cost of human capital. Source: Jagannath Mishra & Pankaj Kumar Kalawatia: Basel II: Challenges Ahead of the Indian Banking Industry 2008 SWOT analysis indicates number of strengths and opportunities to grow in the competitive direction. However, the weakness and threats are also serious and need attention immediately. While there is presence of intellectual capital, there is also a threat of increasing the cost of human capital. Talent management has been neglected over the years. The compensation systems need to be given a fresh look. Technology upgradation and interaction needs to be brought to international standards. The presence of competitions from public and private sphere proves to be a serious threat to performance in banks. Talent acquisition and retention of skilled workforce is posing as a biggest challenge. Some of the suggestions in realigning human resource in the organization may be as follows: Positioning a HR policy The quality of human asset present is the prevailing problem. Very little initiatives have been taken in the last few years. In this crucial but significant area. As the demands on the banking system are increasing and its priorities are refocused to create sustainability and profitability, it is time to restructure and position the HR policies in place. This may be achieved by starting with A HR vision, HR goals and aligning these goals with the banks goals and vision. Involvement of the senior level hr personnel informulation will benefit that process. HR planning Human Resource planning is a process by which the management of an organization determines its future human resources requirements and how the existing human resource can be effectively utilize to fulfill these requirements. It is a system of matching the supply of existing people with opening or opportunities the organization expects over a given period of time. Banks have to suitably realign their existing human resources from surplus to deficit pockets and readjust staffing pattern in a computerized environment. Surplus staff needs to be relocated or reassigned in their job duties. Mobility of the staff is recommended and this may be attained by negotiating with employees’ organizational efficiency and productivity. About 70% staff in each bank constitutes clerical and subordinates staff institute of many charges that the industry has faced over the years, essentially the role of this category of staff has remained unchanged. Job redesigning and role restructuring is recommended at this level in the banking system. Talent Management: Human Resource undoubtedly plays the most important part in the functioning of an organization. The term ‘resource’ or ‘human resource’ signifies potentials, abilities, capacities, and skills, which can be developed through continuous interaction in an organizational setting. The interactions, interrelationships, and activities performed all contribute in some way or other to the development of human potential. Organizational productivity, growth of companies, and economic development are to a large extent contingent upon the effective utilization of human capacities. Hence, it is essential for an organizational to take steps for effective utilization of these resources. Banks have an excellent pool of competent personnel in all the cadres. Such personnel need to be identified, nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. Training and Development: Dynamic and growth-oriented organizations recognize training as an important aspect of the managerial function in a rapidly changing economic and social environment. Training is a continuous and incessant learning process in human resource managerial and interpersonal skills, increase motivation, and improve the effectiveness of people employed in an organization. It also helps to achieve congruence between corporate and personal goals. As the strength of any organization lies in the strength of its people, training is undoubtedly the most important part of organizational renewal as an ongoing process. The Reserve Bank of India has established a number of epics level training centers to cater to the needs of its employees. The focus of the training programmes is on IT adaptation and IT skills. The private sectors banks have also been very receptive and have augmented their training programme and culture. There is a need to address the various issues and concerns in the security need in order to sustain in the techno driven competitive advantage. Performance Assessment: To assess the contribution of training systems and learning infrastructure to the bottom line of the bank, the new generation banks are depending upon competency assessment, performance evaluation and skills rating. The traditional banks may also reorient themselves in the above direction. Transforming the mindset: These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slow but the utilization is not maximized. Facing Competition: Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives include: Investing in state of the art technology as the back bone to ensure reliable service delivery, Leveraging the branch network and sales structure to mobilize low cost current and savings deposits,  implementing organization wide initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction are some of the steps in this direction. Increasing efficiency: Deregulation has made the banking sector more competitive with greater autonomy operational flexibility and decontrolled interest rate and liberalized norms for foreign exchange. Increased competitiveness has made it necessary to look for efficiencies in the business. Hence, banks are facing pricing pressure squeeze on spending and pressure to give thrust on retail assets. Retaining customer loyalty: Customers are reacting to favorably to the value added ofference. Customers have also become more demanding and their loyalties are diffused. Employees need to operate with a more customer centric in their operations. Conclusion: Banks in near future will have to address compensation issues, flexible work schedules, outsourcing and retaining talent. To face the challenge, bank requires enhanced skills, new knowledge and behavioral adjustments of human resources. Bibliography 1. Barth, James, Gerard Caprio and Ross Levine, 2001a. “Banking systems around the globe: do regulation and ownership affect performance and stability”? 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