Although the Indian banking industry is nearly two hundred years old, it is only since the last fifteen years that it has witnessed radical transformation of internal operations as well as products and services. Two significant developments have influenced the functioning of the industry. The first occurred in 1969 when the Indian government nationalized a large number of banks, forcing them to look beyond urban markets and initiate operations in the rural sectors. The next big move came in the 1990s in the form of deregulation, which led to the birth of new generation private banks on the heels of foreign institutions that had been permitted entry through relaxation of FDI norms. These paved the way for an era of intense competition and technology-led transformation within the industry. New entrants leveraged a combination of people, processes and technology to transform the way products and services were delivered to their customers.

1. Banking
Survey 2009
Innovation Perspectives

3. CONTENTS
Preface 01
Executive Summary 03
Challenges for Indian Banks: View from the Top 04
Innovation in the Context of Banking 08
Innovation Strategy 11
Strategic Vs. Incremental Innovation 14
Innovation and Efficiency 16
Innovation for Growth 19
Products, Customer Experience and Collaboration 22
The Role of IT in Innovation 27
How Banks Can Become More Innovative 30
Conclusion 34
About Us 35

4. Preface
Although the Indian banking industry is nearly two hundred years old, it is only since
the last fifteen years that it has witnessed radical transformation of internal operations
as well as products and services. Two significant developments have influenced the
functioning of the industry. The first occurred in 1969 when the Indian government
nationalized a large number of banks, forcing them to look beyond urban markets
and initiate operations in the rural sectors. The next big move came in the 1990s in
the form of deregulation, which led to the birth of new generation private banks on
the heels of foreign institutions that had been permitted entry through relaxation of
FDI norms. These paved the way for an era of intense competition and technology-led
transformation within the industry. New entrants leveraged a combination of people,
processes and technology to transform the way products and services were delivered
to their customers.
This phase was marked by a slew of innovations, especially in the retail space as
banks automated their processes, created new channels, built ATM networks and
delivered services at their customers’ doorstep in both urban and semi-urban areas.
While private sector and foreign banks led the transformation in its early stages,
public sector banks followed suit by deploying core banking platforms that connected
their numerous branches and allowed them to offer competitive products. Over the
next few years, the Non Performing Assets (NPAs) of banks decreased marginally as
they targeted new business fuelled by a growing economy and rising urban
middle-class income levels. Today, nearly every large bank leverages technology to
offer Internet banking services and, in several cases, mobile banking as well. Banks
are also augmenting their traditional offerings with non-banking products like
insurance, besides exploring emerging opportunities such as micro-banking.
The last few years have been challenging for the banking industry which has
witnessed both significant competition and consolidation. An evolving regulatory
framework has added to the pressure by way of stricter compliance mandates. And
it is needless to point out the extent of the impact of the economic downturn on the
industry. The Planning Commission’s draft document of the 10th Plan forecasts a
likely deceleration in the pace of expansion of banks’ balance-sheets. The combined
assets of all scheduled commercial banks are estimated to touch Rs 40,90,000 crores
by end-March 2010. That will be about 65 percent of GDP at current market prices
as compared to 67 percent in 2002-03. The annual composite growth rate of banking
assets is expected to slow to 13.4 percent during the rest of the decade from the 16.7
percent level that prevailed between 1994-95 and 2002-03. The report also predicts
large additions to the capital base and reserves on the liability side.
1

5. Preface
In this milieu, it is a significant challenge for Indian banks to sustain growth and
profitability. They will have to innovate to enhance process efficiency, optimize
costs, rejuvenate products, add channels and improve customer experience to
remain competitive.
The Economic Times and Finacle from Infosys are pleased to present this exhaustive
report on Innovation in Indian Banking, based on a detail study. The objective of this
study is to provide insights into the key challenges and opportunities before Indian banks
and the way in which they plan to overcome the former and leverage the latter. More
importantly, the report presents senior managements’ perception of innovation and their
vision for translating that into innovative processes, products, channels and customer
experience. The study showcases perspectives from 70 C-level executives across 33
leading banks in India. 43 percent of the banks covered are public sector banks, while 36
per cent are private sector banks. Foreign banks and other institutions such as
cooperative banks and regional banks account for 9 percent and 12 percent respectively.
Banks by Category
Others, 12% Public Sector
Foreign Banks, 43%
Banks, 9%
Private Sector
Banks, 36%
27 percent of our respondents were CEOs and CMDs, 33 percent were business heads and
40 percent were CIOs and IT Heads.
Respondents by Designation
Business CEOs, 27%
Heads, 33%
CIO/IT
Head, 40%
2

6. Executive Summary
This report takes a strategic view of innovation in Indian banking, with insights from
top industry executives. We examine strategic innovation vis-à-vis incremental
innovation and their relative importance to growth and efficiency. We assess the
barriers to innovation and evaluate the steps taken by banks to enhance their
innovation agenda across the business. This study reveals the following about
Indian banks:
• They aim to be innovation leaders and look to establish best practices for new
age banking. 56 percent of the respondents said their banks were aiming to lead
innovation with respect to the local market as well as international best practices.
• They are focusing on strategic and incremental innovation. 77 percent of the
respondents said they were pursuing strategic and incremental innovation in
equal measure.
• They consider innovation extremely important for growth and efficiency.
88 percent felt innovation was critical for growth and 57 percent said innovation
was extremely important for efficiency improvements.
• They are increasing investments in innovation, with several banks in the process
of instituting an independent function to co-ordinate the same. 83 percent said
their banks were increasing investment on innovation and 25 percent said they
were in the process of creating a separate department to coordinate innovation.
• Technology-led innovation is perceived to have maximum impact on efficiency
improvement and product delivery. 38 percent said IT was extremely important
for innovation and 47 percent said it was very important.
• Internet technologies, mobile technologies, Business Intelligence (BI) and
analytics software along with web services are viewed as having a clear impact
on innovation initiatives.
• Innovation is the industry’s direct response to regulatory and compliance
challenges. 58 percent said they were becoming more innovative in response to
regulatory and compliance challenges.
3

7. Challenges for Indian Banks:
View from the Top
Although the banking sector is all set to
fuel economic growth in the years to K.V.KAMATH
CHAIRMAN, ICICI BANK
come, it must address multiple challenges
at various levels to achieve desired levels
“Innovation has been a
of functional efficiency. 90 percent of
critical element of the
respondents affirm that the recruitment,
transformation paradigm.
development and retention of talent is a It is a continuous activity. We can’t say
key challenge. that we have innovated enough and rest.
There is always a need to revisit what we
For many public sector banks, the
have done. Contexts change, opportunities
problem lies in the ageing manpower change and we need to examine how we
which needs to be replaced with equally can do things differently every time.”
skilled personnel. While several Banks
including State Bank of India (SBI) are
on a recruitment spree, Canara Bank and For many other banks the human
smaller public sector banks like Vijaya resources issue is directly linked to
Bank and Corporation Bank, among increasing competition. Banks will
continue to compete for quality business
Top CEO Challenges and customers, financial resources and
deposits in addition to physical resources
such as branches and ATMs. Their
challenge is to groom their staff so that
they don’t merely survive, but thrive
amidst the competitive pressure.
While many private banks seem to have
others, are impeded by a shortage of
got the people equation right, most of
talent. At Canara Bank, for instance,
them observed that nurturing human
staff at various levels, recruited in
capital was crucial. At ICICI Bank, the
the 1970s, will retire in 2009-2010.
Replacing them suitably will be a largest in India’s private sector, the
Herculean task. emphasis is on getting the skill-set mix
4

8. earn revenues. Needlessly to say, they
ALBERT TAROU will be adversely impacted if customers,
CMD, VIJAYA BANK
with inadequate knowledge of these
“When you deploy cutting products, incur losses, from investments.
edge technology, human Hence, the challenge of managing the
resources must be ensuing risks is of significant concern.”
competent as well. It’s important that the says J.M.Garg, CMD, Corporation Bank.
ageing work profile, especially at public In addition, banks must also address the
sector banks, be continuously tuned and risk of doing business with companies
complemented by fresh talent recruited having ambitions of multi-national
directly from outside of the organization.” expansion. Innovation is the key to
success in all these areas.
right. “Our challenges will be in terms Raising capital in compliance with Basel
of ramping up branch network we did II norms is a challenge for many banks.
However, most CEOs we interviewed
not have. Getting the skill set equation
assured us that they had their strategy
right in the branch context will also be
perfected. While liquidity is flowing freely
critical.” says K.V. Kamath, Chairman,
ICICI Bank.
NEERAJ SWAROOP
REGIONAL CHIEF EXECUTIVE,
Post implementation of Basel II, risk INDIA AND SOUTH ASIA,
STANDARD CHARTERED BANK
management is also perceived as a major
challenge. 40 percent of our respondents “Risks must be managed
felt the need for robust risk management in a way that they allow
systems. Some of them noted that banks profit optimization without compromising
must carefully navigate the path to on the longer-term sustainability of
managing new risks arising from the the business.”
introduction of new products. “Today we
see that there are new products like the at present, it may become a cause for
derivatives of commodities and futures. concern in the coming months if the
Banks must address the challenge of Government of India borrows heavily as
understanding these products and yet per expectations. “Various stimuli from
5

9. the government will adversely impact
liquidity and the quality of credit.” YOGESH AGARWAL
CMD, IDBI BANK
cautions Jayarama Bhat, CMD,
Karnataka Bank. “Upgrading skill sets to
perform and deliver in this
It has been almost a year since the
environment would be a
recession set in and the after-effects
key challenge for banks. Retention of talent
are clearly showing. In general, the would also be crucial.”
quality of banking business has been
adversely impacted. Most banks we world-class customer services, adherence
spoke to have started to closely monitor to KYC (Know Your Customer) and
asset quality. “The challenge is to ensure AML (Anti Money Laundering) norms,
that we maintain growth without
improvement of channel productivity,
compromising quality, because these
cost control and maintenance of
are two sides of the same coin. It’s
profitability margins.
important to maintain the quality of
business at high levels. Maintaining Respondents believe that adherence to
asset quality would also be key.” says international standards of corporate
M.D.Mallya, CMD, Bank of Baroda.
governance, including those related
Other business challenges cited by to transparency and disclosure will
respondents include the provision of be crucial. Scaling up technology
architecture is also viewed as a major
challenge by both public and private
M.D.MALLYA
CMD, BANK OF BARODA. sector banks. “As we expand reach and
“The challenge is to ensure add services to our portfolio, scaling up
that we maintain growth technology infrastructure to meet
without compromising quality, the needs of the business becomes a key
because these are two sides
challenge.” says Sanjay Sharma, CEO
of the same coin. It’s important to maintain the
IDBI Intech, the IT arm of IDBI Bank.
quality of business at high levels. Maintaining
asset quality would also be key.” IDBI Bank is planning to double its
number of branches over the next year.
6

10. For many public sector banks, with a friendlier with the spectrum of clientele
diverse customer base spanning age that a public sector bank has, because
groups, the challenge is to promote the it’s so wide and varied. We have farmers
use of technology-enabled products. “The who are not tech savvy and pensioners
biggest challenge is to make technology who draw Rs. 350/- a month. Both would
like the bank to address their specific
R.I.S. SIDHU needs. It’s essential they all reap the
CIO AND CHIEF COMPLIANCE
OFFICER, benefits of technology,” says R.I.S. Sidhu,
PUNJAB NATIONAL BANK.
CIO and Chief Compliance Officer,
“The biggest challenge is to Punjab National Bank.
make technology friendlier
with the spectrum of clientele that a public As banks look to creatively overcome
sector bank has, because it’s so wide and
these challenges, they will benefit most
varied. We have farmers who are not tech
from those innovations that tap new
savvy and pensioners who draw Rs. 350/-
opportunities, optimize cost structures
a month. Both would like the bank to address
their specific needs. It’s essential they all reap and deliver the right product mix
the benefits of technology.” to customers n
7

11. Innovation in the Context
of Banking
Within the business context, innovation ones to offer certain products and
translates into efforts that result in a services.” points out Chanda Kochhar,
product, service or process that helps CEO, ICICI Bank.
organizations transform and grow. 3
Evolution of Innovation
Products in the banking industry are
In the government regulated environment
more often notional than physical, and
of the 1970s and 1980s, every bank offered
rarely, if ever, protected by Intellectual
the same products and services. It was
Property (IP) rights. As a result, almost
only in the late 1990s, when private
every process, product, service and
sector and foreign banks entered the
delivery channel can be replicated and
fray that the wellsprings of innovation
bettered by competing banks. With any
were truly tapped. These banks pioneered
banking innovation having a short shelf
the use of technology to enhance process
life, there is very little advantage for
efficiencies. Consequently, ATM networks
the first mover.
were ushered into urban India in the
Some innovations help banks improve late 1990s and the early part of this
internal efficiencies, reduce costs and century. Innovations grew beyond the
payment system. A plethora of loan
CHANDA KOCHHAR products, with competitive interest rates
CEO, ICICI BANK.
and repayment schemes triggered the
“Innovation helps create retail banking revolution. Many banks
differentiation in the minds added incremental value to their products
of customers, to whom we
by throwing in additional services. For
can be the first ones to offer certain products
instance, some banks assisted their
and services.”
customers in finding and buying a home, in
addition to financing the purchase. Used
further their business goals, while others
car re-finance was another innovation
positively impact banking customers.
conceived during this period.
Banking innovation is both an enabler
and a differentiator. “Innovation helps Banks also innovated on their deposits.
create differentiation in the minds of Several allowed customers to earn higher
customers, to whom we can be the first interest on their savings by offering a
8

12. `sweep in’ facility whereby funds • Kotak Mahindra Bank allows
exceeding a pre-specified amount were customers to buy and sell mutual
automatically moved into a fixed deposit funds through its ATM
account. Kotak Mahindra Bank went a
step further by enabling excess funds in • IDBI Bank goes a step further, offering
customers’ accounts to be invested in a airline bookings through its ATM
high-yielding liquid mutual fund.
• HDFC Bank pioneered the mobile
Paradigm Shift Point of Sale (PoS) terminal which is
slated to make the use of plastic for
Over the years, technology and innovation
transactions ubiquitous
have enabled banks to move from a
`working hours/week days’ model to an
• Standard Chartered Bank pioneered
‘always-on 24x7’ framework. Some
the concept of a single card that doubles
examples include:
up as both credit and debit card
• ICICI Bank’s 8 am to 8 pm banking in Innovations have not been restricted to
many cities large private sector banks and foreign
banks. Smaller public sector banks have
• HDFC Bank’s 24x7 branch at Mumbai
also leveraged their size, scale and areas
International Airport of operation. Corporation Bank, one of
the smallest in the public sector, allows
Banks have also taken services
customers to remit income tax through
to customers’ doorsteps. Some
its comparatively small ATM network.
examples:
Public sector banks have largely delivered
innovation through their branches. Bank
• SBI and ICICI Bank introduced mobile
of India, for instance, has established
ATMs in some cities
solar powered branches in some remote
• Kotak Mahindra Bank delivers money rural areas where power is scarce.
to customers’ homes ICICI Bank was the first to launch a
business correspondent model where
Customer facing innovations are representatives provided banking to the
aplenty. For instance: rural poor. Many of the public sector banks
9

13. we spoke to are emulating this model to New Channels
penetrate rural markets.
A significant majority of respondents
Banks have innovated in the predicted that future innovation would
corporate space too. focus on channels and the delivery of
new products over them. Most banks are
• SBI took the lead in offering MIBOR betting big on Internet and more
rates to top companies. Many banks recently on the mobile, as the delivery
followed suit with similar offerings platform of the future. They point out
that net transactions have shown an
• ICICI Bank securitized Rs. 4.2 crores
upward trend in the last couple of years
for Bharatiya Samruddhi Finance for and see good potential ahead. The mobile
crop production, thereby becoming the is a platform on which they expect to
first bank in the world to securitize a deliver maximum innovation. “India is
microfinance portfolio well known as the hub of innovation
around the mobile space. These are
• HDFC Bank launched a seamless CMS
mostly process innovations where the
Supply Chain System to connect to
mobile industry has driven costs down
its corporate customers running
dramatically and thereby increased
SAP and other ERP systems. With
efficiencies and usage. This is going to
this, customers were empowered to
surpass the Internet as a preferred
transact and manage their wholesale
channel.” says Aniruddha Paul, Head-
banking services across geographies
Change Delivery, ING Vysya Bank.
using a single platform Respondents from public sector banks
believe that the mobile platform will
• Standard Chartered Bank’s “kiosks”
help them extend services to their
extended virtual banking to customer
rural customers and reach out to
premises
the unbanked n
10

14. Innovation Strategy
A whopping 96 percent of our respondents systems and processes to enhance
said that their banks had a clear strategy customer experience, while managing
for innovation. However, for a majority, risks and costs. HDFC Bank, another
this was an integral part of their business mature IT user, has a two-pronged
3
strategy. They were of the opinion that strategy - expand network to capture new
innovation cannot be viewed in isolation, customers and more importantly, mine
but in tandem with the overall business internal (branch banking) customers for
incremental business.
Do You Have a Strategy for Innovation?
At ING Vysya, where the traditional client
Yes, 96% base built over a period of 70 years is being
No, 4% augmented by new customers, innovations
are tailored for customer segments
through a streamlined mechanism.
The key elements of YES Bank’s strategy
strategy. The rationale for the innovation for innovation include encouraging the
strategy factored in business imperatives spirit of professional entrepreneurship
like competition, customer retention among employees. A knowledge-driven
through better services and customer approach to financial solutions and
acquisition through the launch of technology makes for quality service.
innovative products. Rana Kapoor, the CEO and founder of
the bank strongly believes that these
Banking innovation is driven by strategic
will be the pillars of the bank’s
considerations premised on both short and
innovation engine.
long term objectives. The more mature
users of IT among banks rely on advanced Meanwhile, Kotak Mahindra Bank is
Business Intelligence (BI) tools to power focusing on internal innovation to
innovation. The strategy at Standard increase channel productivity.
Chartered Bank, for instance, is to
optimally use Business Intelligence to Punjab National Bank, which has a
track customers’ evolving needs and nationwide network of over 5,000
improve products and services. The bank branches, talks of creating 100,000 touch
continually undertakes improvements of points spanning the urban, semi-urban
11

15. and rural markets. Their strategy Not all banks have a strategy outlined
entails deploying technology to penetrate specifically for innovation. However, they
under-exploited market segments with understand that it is critical to growth
meaningful’ products. and efficiency. Their business strategies
factor in the need to innovate both
At Bank of Baroda, the top management
inward-looking aspects such as processes
plans to put in place innovation policies as
and outward-looking elements such as
an adjunct to their ongoing Business
channels, products and customer service.
Process Re-engineering (BPR) exercise.
Technology with a Human Face
Smaller regional banks have innovation
high on their agenda, as evident from the Public sector banks including Syndicate
following examples: Bank, Corporation Bank and Vijaya Bank
are keen to deliver innovation powered by
• Federal Bank is improving its
technology, but with a human touch. They
payment systems by enabling believe that the human element is crucial
straight-through-processing of to customer retention.
remittances
Innovation Leadership and Next
• Dhanalakshmi Bank is investing Practices
heavily on IT to deliver a suite of
new products and services We asked respondents whether the banks
they represented aimed to emerge as
• South Indian Bank, which brought innovation leaders relative to just the
down the average age of its customers domestic market or international best
from 51 to 39, is planning to unveil
innovative schemes, including some Is Your Bank Aiming to be an Innovation Leader?
targeted at students, under its `next
Relative to the
generation banking’ campaign local market,
44%
• Lakshmi Vilas Bank is looking Relative to local
market and
to leverage tie-ups with larger international best
practices, 56%
banks to offer new services such
as brokerage
12

16. practices as well. A majority of these new customers across the counter.
banks have strong domestic operations ICICI Bank was the first to introduce
and believe that Indian conditions this concept in international markets
demand a distinct treatment. 44 percent where opening an account across the
aimed to be innovation leaders in the counter was unheard of. Remittances
domestic market, while 56 percent are another area where India has
sought to lead innovation both locally created highly cost effective models,
and in the global market. unknown in other parts of the world.
“In which other country can you take
“I would not say our best practices will
a technology and apply it to a billion
have to be a mix of global and Indian. In
people?” she questions,” It’s only here
fact, we should go ahead and create
that you can test things on a scale
best practices for the world to follow.”
that is so large that you make your
says Chanda Kochhar of ICICI Bank.
products cost effective and then apply it
She cites the instance of ICICI Bank
everywhere else.” n
starting the practice of giving a kit to
13

17. Strategic Vs. Incremental
Innovation
organizational structure. The exercise
resulted in the closure of 26 zonal
offices and enabled faster decision
making. State Bank of India
3
undertook a similar project as part
of a larger restructuring exercise and
reduced the number of its zonal offices
Strategic Vs. Incremental Innovations
80%
70 %
60%
Banks can approach innovation from a 50%
40%
strategic or incremental perspective. 3 0%
20%
10%
When a bank revises its business model 0%
Strategic
and sets in motion transformation Both strategic and
incremental in equal
measure
resulting in competitive advantage and
large-scale organizational impact, the
innovation is clearly strategic. But not
• Recently, ICICI Bank moved from
all innovation need be as dramatic.
an outsourcing model to an
Improved processes, channels and
in-house model to enhance cost and
products are the basis for incremental,
operational efficiencies
yet highly effective innovation. The past
decade has seen Indian banks innovate • Dhanalakshmi Bank is in the midst
strategically as well as incrementally. of organization-wide technology
transformation expected to bring in
Instances of strategic transformation
process efficiencies along with
abound in the Indian banking industry,
innovation in channels and products
as shown below:
• Standard Chartered Bank introduced
• Punjab National Bank hired Boston cards that double up as both debit and
Consulting Group to review its credit cards
14

18. • Bank of Baroda undertook an the opinion that a series of incremental
organization-wide Business Process innovation across multiple facets of
Re-engineering exercise a bank’s business can amount to
strategic innovation.
Most banks we spoke to are looking
to innovate both strategically and Respondents expressed the view that
incrementally. 77 percent of respondents while strategic innovation was primarily a
indicated that their banks were working top management prerogative, incremental
on strategic and incremental innovation innovation emerged mostly from lower
in equal measure, while 23 percent levels, particularly the customer-facing
maintained that strategic innovation was
field force. They opined that incremental
on top of their agenda.
innovation could have significant and
Typically, public sector banks, regional positive, long term impact. “Strategic
banks and old generation private innovation looks great on paper. But
sector banks are focusing on strategic it’s the smaller, incremental innovations
innovation. At these banks, incremental that can improve customer experience
innovation often follows strategic which really counts.” says K. Ram Kumar,
innovation. New generation private sector Executive Director, ICICI Bank. A
banks and foreign banks are working clear example is ICICI Bank’s focus
on a mix of both strategic and incremental on innovation to reduce the IVR call
innovation. Some respondents are of hold time n
15

19. Innovation and Efficiency
How Important is Innovation for Efficiency
Improvements at your Bank?
4%
8%
Somewhat Important
Important
57% 31% Very Important
Extremely Important
felt that innovation was extremely
important to achieve efficiency
improvement, while 31 percent said it was
very important.
The banking industry is witnessing
significant widening and deepening of Many of the banks we spoke to are
markets and a corresponding increase leveraging IT for product and service
in the scale of activities. Business delivery and automating critical processes
is increasingly going international; to enable straight-through-processing.
therefore, it is crucial for banks to Some of them told us that they have put
understand global business dynamics. in place process management systems
Many of the banks we spoke to are of for seamless execution of customer
the view that while product innovation transactions and risk mitigation. IDBI
lends competitive advantage to an Bank carried out a comprehensive BPR
organization for a few months, process exercise recently. Now, the bank has a
innovation can do so for a significantly full-fledged BPR department driving
longer period. process efficiencies.
Innovation and Efficiency
At the core of HDFC Bank’s efficiency
Improvements
strategy are its quality initiatives,
We asked the respondents to rate the which are expected to create customer
impact of innovation on future efficiency delight. One such process of collecting
improvement at the banks. 57 percent documents for new sales acquisition is
16

20. “First Time Right” (FTR). Focused enable online real-time tracking. Tools
measurement and management of FTR provide online MIS, enabling managers
metrics has enabled the bank to utilize to allocate resources optimally.
sales capacity optimally. The bank has
We also queried respondents on the
also invested significantly in technology
approach adopted by their banks
and other resources to support the
towards innovation aimed at achieving
quality initiatives. “This has helped
cost reduction, operational process
tremendously to reduce our unit cost of
redesign and technology upgrade.
operation despite increase in volumes”,
states a spokesperson from the bank.
On the cost reduction front, 47 percent of
At Standard Chartered Bank, two respondents said the level of activity was
critical metrics tracked regularly are very high and 36 percent said it was fairly
transactional cost per unit and operations high. However, only 21 percent of the
cost as a percentage of revenue. The bank respondents said the level of innovation
has invested in sophisticated productivity with respect to cost reduction was very
measurement and tracking systems that high and 36 percent said it was fairly high.
General Cost Reduction Exercises General Cost Reduction Exercises
Level of Activity Level of Innovation
4%
6%
17% Low
21%
High Not High
47% High
Fairly High
33%
Very High 36% Fairly High
36%
Very High
17

21. On the operational process redesign front, 17 percent said the level of activity in their
banks was very high and 65 percent said it was fairly high.
Operational Process Redesign and Simplification Operational Process Redesign and Simplification
Level of Activity level of Innovation
2%
8%
Not High
17% 10%
High
40% High
Fairly High
Fairly High
Very High 58%
Very High
65%
43 percent of respondents said that the level of activity in core technology and systems
redesign or replacement was very high. 22 percent said that the level of innovation in
this area was very high.
Core Technology & Systems Redesign Core Technology & Systems Redesign
or Replacement Level of Activity or Replacement Level of Innovation
6% 6%
4%
Low 8% Low
22%
13% Not High Not High
43% High 22% High
Fairly High Fairly High
34% 42%
Very High Very High
6 percent of respondents said that the level of activity technology outsourcing was very
high and just 4 percent indicated that the level of innovation in technology outsourcing
was very high. Most of the banks believe that outsourcing is feasible only in limited
ways and with respect to functions that are non-critical n
Outsourcing of Activities Level of Activity Outsourcing of Activities Level of Innovation
6% 4%
Low Low
23% 29% 27%
Not High 29% Not High
High High
14% Fairly High Fairly High
28% 20% 20%
Very High Very High
18

22. Innovation for Growth
In any competitive environment, customer was extremely important, 31 percent
acquisition and growth are decidedly said it was very important, 8 percent
powered by innovation. By innovating, said it was important while only 4 percent
companies challenge the status quo and said it was somewhat important. 3
create new offerings that customers are
Growth Drivers
willing to purchase. Companies innovate
when they find ways of reaching out to RBI estimates growth in the banking
untapped markets and geographies. sector to be in the range of 18 to 20 percent
Innovation & Growth
70%
60%
50% 57%
40%
30%
31%
20%
10% 4%
8% 8%
0%
Somewhat Important
Important Very
Extremely
Important
Important
Eventually these innovations drive over the next year. According to Indian
growth. The story is no different in the Banks’ Association’s vision document,
banking sector. banking assets are expected to account
for two-thirds of India’s GDP. Thus,
We asked our respondents how important depending on their reach and strength,
innovation was to them from a growth banks are focusing business energies on
perspective. 57 percent indicated that it verticals such as:
19

23. have set up business verticals to provide
best-in-class services and products to
large corporate houses, MSME, agro-
business and the personal banking
segments.” says M.V.Nair, CMD, Union
Bank of India. The bank is planning to
leverage technology to create innovations
aimed at Increasing delivery efficiency.
Banks are looking to generate fee based
income from M&A, loan syndication and
para-banking activities such as insurance
and mutual fund distribution. Bill
collection and payment of services is one
growth area where banks are planning
• Infrastructure, construction and to innovate leveraging e-banking, ATM
construction equipment and mobile banking channels.
• Retail Bank of Baroda, for instance, is planning
a series of product rollouts in this area.
• Agriculture and rural business
CMD M. D. Mallya sees retail business
• Government
as a major growth driver of both assets
Banks are reorganizing their business and liabilities. “On the liability side, I
to tap these segments. For instance, IDBI see an increase in customer base as retail
Bank has recently created customer- customers will provide us more savings
focused verticals which, inter alia, cover and current accounts. On the assets
personal banking, SME, agri-business side, we have a number of products that
and infrastructure to tap the growth could be utilized for cross selling, whether
potential in these sectors. The bank is it’s a housing loan, vehicle loan,
innovating to provide customized, focused educational loan or a trader’s loan.
and efficient services to these segments. There are opportunities to innovate
Another bank considering vertical focused here,” he says. Mallya is also expecting
innovation is Union Bank of India. “We corporate business to drive volumes
20

24. and grow the overall business. He believes Customers are presented with biometric
that it could also facilitate cross-sales cards that act as passbooks. They are
in terms of employee payroll accounts offered overdraft facilities ranging from
and so on. Bank of Baroda is also reviving Rs.500 to Rs.1,500. Transactions are
a subsidiary for merchant-based lending supported online between 10 a.m. and 6
and syndication activities. p.m. Customers are also given credit
cards. The bank offers both life and
Some banks believe that financial
non-life insurance products to rural
inclusion and micro-banking are the
customers. In addition, they train
next big opportunities and expect these
prospects for employment within the
to significantly contribute to their
organization. The bank has already
growth in the years to come. Corporation
collected Rs.25 crores in deposits and is
Bank has put in place a business
looking to increase it manifold this year.
correspondent model spanning 400
“The cost of servicing is high. But we
villages. According to CMD, J.M.Garg,
are getting deposits at 3.5 percent and
the bank is planning to cover more than
lending at 9 percent. It is a 20 to 30
2,000 villages this year alone. Corporation
year game plan and there is immense
Bank’s business correspondents are
scope for innovation.” says Garg n
mostly grocers or retired teachers.
21

25. Products, Customer
Experience and Collaboration
Indian banks are realizing that Technology transformation at banks,
continuing focus on only driving-up sales undertaken with a view to positively
in an attempt to get more customers, can impact its innovation agenda and
be counterproductive. They have long efficiencies, is viewed as a complex and
3
since realized the value of investing challenging program. More than
resources to retain and thus grow revenue
plugging a new application into the
from customers. We find that banks are
bank’s IT infrastructure, respondents
looking at creative means of packaging
were of the view that it encompasses a
and delivering their products to set
host of services, from consulting to
themselves apart from their rivals as well
infrastructure management to BPO.
as to stay a step ahead on the path to
effective and meaningful differentiation.
In fact, the drive to leverage technology
Product Bundling or Packaging
for connectivity and information, is also
gaining impetus among Indian banks.
13%
22%
Not Important
Somewhat Important
27%
Product Technology Features Very Important
20%
Extremely Important
2%
7%
29% Not Important
Somewhat Important
62% Very Important
Extremely Important 22 percent of the participants felt that
product bundling and packaging are
extremely important components on the
innovation agenda while 27 percent
Our study attempted to gauge
were of the opinion that these are
respondents’ perception of factors driving
innovation impacting products, channels somewhat important.
and customer experience.
For instance, a savings account that
62 percent of our respondents believe doubles up as a fixed deposit or a
that product technology features are savings account linked to mutual
very important for innovation while only funds, like the Kotak Mahindra
7 percent were of the view that it was ‘sweep in’ account, holds an attractive
extremely important. proposition for customers.
22

26. Banking customers are wide and varied, constituent of a broad consumer segment.
and so are their financial needs. Several Consider a home loan customer with a
respondents were of the view that clean track record, forced to default on
banks must look to further develop its account of a job loss. The bank must treat
products and services to specifically the customer with greater lenience
serve these differentiated requirements. versus a habitual defaulter. If the bank
Custom bundling products for different were to propose a temporary waiver or a
segments, they opined, was one way of restructuring of the loan, it would not
doing this. A significant section of only secure the customer's loyalty but
respondents further qualified their also reduce the risk of future non-
response by stating that it is easier to sell payment, as well.
more products to an existing customer
Product Personalization
than go about acquiring a new one. The
ability to introduce small variations by
way of bundling or preferential offers, 13%
Not Important
31% 9%
Somewhat Important
they felt, increases their ability to cater
Very Important
to a larger cross-section of customers, 47% Extremely Important
with a smaller core set of offerings.
Personalization was rated as one of
the most important factors while 28 percent of the survey participants
innovating on products. 31 percent of said innovation in product pricing was
the respondents said it was extremely extremely important and 43 percent said
important and 47 percent noted that it it was v ery important.
was very important.
Product Pricing
There seems to be greater than ever
before emphasis on taking 6%
Not Important
personalization to the next level and 28% 23%
Somewhat Important
Very Important
understanding each customer
Extremely Important
43%
qualitatively and individually; and not
viewing him as an undifferentiated
23

27. Interesting views were expressed by
When Innovating with Customer Relationship or
respondents, in the arena of pricing Customer Experience, How Important
are the Following?
related innovations. One initiative that
is likely to catch the imagination of
Technology features
bankers, is the move to develop 28% 30%
Staff capabilities
channel-preferential pricing that is Process desugn
42%
segment-specific as well. For instance,
a Gen-Y customer who prefers to use
Internet banking would pay a small
technical collaboration with companies
premium to use a branch service, while
from other industries was more
a retired senior citizen would be
important. Very few believed that
charged a small premium for a mobile
collaboration with competitors would be
banking transaction.
important from an innovation standpoint
We also surveyed respondents on factors
Banks are under unprecedented pressure
that influence customer experience. 42
today – from customers demanding more
percent of the respondents opined
for less, from regulators expecting tighter
that staff capabilities were most
compliance and from competitors vying
important while innovating on customer
for market share. In order to stay on top of
experience. 30 percent felt technology
their game, respondents were unanimous
features were of utmost importance
in their opinion that there is need to take
with respect to customer experience.
Almost a similar number accorded Will Partnerships and Collaborations be more or
less Important in the Future for Innovation
process design top priority. at your Bank?
With competitors
Partnership and collaboration also play 11% 8% With companies from other
industries: for distribution
partnerships
a critical role in innovation at banks. 33 26%
With companies from other
33% industries: for combining
percent of our respondents said that their capabilities and technologies
22% With major suppliers
supplier partnerships played a critical With small, innovative
companies
role in their innovation programs. 26
percent said distribution partnerships
with companies from other industries innovative action, in one form or the
were critical. 22 percent of them felt other, and make it count.
24

28. By leveraging the collective wisdom, investment came next, followed by
techniques and technology at their management focus on other priorities
disposal, banks are innovating to emerge and insufficiency of innovative ideas.
winners, and create a brighter future. Bottlenecks in IT development and
regulatory compliance mandates were
Barriers to Innovation
not seen as barriers by most respondents.
We asked respondents to rate 11 factors
Respondents were unanimous that
that could act as barriers to innovation.
the regulatory compliance framework
Lack of coordination across departments presented little challenge and did not
and management/ employee attitude hinder innovation, in general. When
were identified as the biggest barriers we asked them whether they were
to innovation. Lack of senior executive becoming more or less innovative in
support came second followed by response to the regulatory framework,
companies’ risk aversion and inflexible 58 percent said that were becoming
IT systems. Lack of incentives to more innovative, while the rest saw
reward innovation among employees no correlation between compliance
was seen as less of a barrier. Lack of and innovation.
Factors that are Most Likely to Act as Barriers to Innovation
16%
14%
12%
10%
8%
6%
4%
2%
0%
Lack of senior Lack of Lack of co- Insufficient Management Inflexible IT Bottlenecks in Risk aversion Regulatory and Management Lack of
executive investment ordination innovative and employee systems IT of the compliance focus on other incentive
support across ideas attitudes and development company requirements priorities schemes and
departments behaviour compensating
benefits for
innovation
25

29. Respondents were largely univocal in It is also important, according to several
stating that bringing in the innovation respondents, that successful innovation
culture is not very different from be defined by the right parameters.
making an organizational thought-shift. Although Return On Investment (ROI)
For any organization to create a culture is important, it cannot be the only
of innovation, they said, change must
measure of success, they clarified. Some
start at the top. Leadership, they opined,
examples of such innovation, they
must create an environment that not
mentioned, impacted brand equity or
only rewards and nurtures innovation
even customer advocacy, without having
but encourages its people to feel ‘safe’
a direct impact on the immediate ROI n
to innovate.
26

30. The Role of IT in Innovation
in processes, product delivery, cost
optimization or organizational agility,
IT is clearly playing the enabling role.
The Importance of IT
We asked our respondents how important
IT was for innovation within their
organizations. 38 percent said that it was
Importance of IT for innovation
5 0%
40% 47%
30%
38%
20 %
Information technology has driven almost 1 0%
15% 3
0%
every innovation rolled out by banks in
Important
Very Important
the past decade. Technology has led to Extremely
Important
the deployment of core banking systems,
extremely important. A majority of the
phenomenally improving efficiencies. It
respondents who said so were from banks
has also driven down transaction costs
that had either rolled out core banking
and provided impetus to the emergence
across all branches or were in the process
of new channels like Internet banking
of doing so. 47 percent of the respondents,
and more recently, mobile banking. A
mostly from banks that were relatively
number of new products delivered
through these channels are technology-
Maximum Impact of IT from an
driven as well. Technology has empowered Innovation Standpoint
Customer
banks to access astronomical amounts Experience, 16%
Cost
Optimization, 18%
of data, playing a critical role in the Organizational
Agility, 18%
creation and deployment of knowledge
systems that predict customer behavior
Process
Innovation and
and preferences and take banking to Delivery, 22% Process
Innovation, 26%
the next level. Whether it is innovation
27

31. advanced users of IT, felt that IT was v the respondents said that IT impacted
ery important for innovation. customer experience significantly.
We also asked them where IT could Technologies Impacting Innovation
create maximum impact within their
Mobile and Internet were rated as the
banks. Process innovation topped the list
top technologies driving innovation by
with 26 percent saying that the impact
33 percent of the respondents. Business
of IT was most evident while improving
Intelligence tools were next with 24
process efficiencies. 22 percent of our
percent of the respondents saying that
respondents felt that IT revolutionized
these would play a major role in banking
product innovation and delivery. 18
innovation. Most of the respondents
percent were of the opinion that IT
who chose Business Intelligence (BI) were
had the maximum impact on cost
from banks that had recently embarked
optimization and an equal number
upon or completed data warehousing
believed it enhanced organizational
projects. Virtualization took the next
agility. Surprisingly, only 16 percent of
What Technologies will Specifically Impact Innovation in the Banking Sector?
Business
Intelligence and
Analytical
Software, 24%
Software-as-a-Service, 4%
VoIP and
Communication Cloud Computing, 3%
Technologies, 6%
Virtualization, 12%
Mobile
and Internet
Technologies, 33%
Web Service/SOA, 18%
28

32. place with 12 percent of the respondents incremental benefits when deployed with
saying that it would have considerable other powerful technologies. Most
impact on innovation related to respondents preferred traditional
resource optimization. Web services software licensing models to Software-as-
and SOA followed with 18 percent of a-Service (SaaS) and felt the latter was
the respondents identifying these as
not yet mature enough to significantly
technologies that could power innovation.
impact innovation. A few of the
The surprise, however, was VoIP respondents were aware of the concept of
and communication technology. Most cloud computing and its possible relevance
people believe that this could provide to innovation in the banking sector n
29

33. How Banks Can Become
More Innovative
If innovation is to drive efficiency, growth Is Innovation a Top Priority for
and differentiation, banks must find the Banks?
means to cultivate this spirit across the
organization. At the strategic level, We asked our respondents whether
banks can make innovation a top priority the banks they represented had
and roll out a clear plan in tandem with made innovation a top priority. An
the overall business objectives of the overwhelming 88 percent responded in
organization. They must earmark a the affirmative. Only 12 percent of the
budget for innovation. They can go a step respondents said their banks were yet
further by creating a separate department to elevate innovation to the top of the
which solely co-ordinates and supports priority list.
innovation efforts across all others.
Banks must institute systems to ensure Making Innovation a Top Strategic
Priority
that the innovation vision percolates to
employees at all levels. They must initiate
No, 12%
training programs to sensitize staff to
customer needs and nurture innovation Yes, 88%
that not only results in improved Yes
efficiency, but enhanced customer No
experience, loyalty and retention.
Banks that truly consider innovation
as a key differentiator must reward Have Banks Charted a Clear
innovative ideas. If innovation is to drive
Innovation Strategy?
growth and profitability, it must be the
cornerstone of their business strategy. When we asked the banks if they had a
clear innovation strategy, 96 percent
Interviews with our respondents revealed responded in the affirmative. However,
that banks in India are increasingly most qualified their answer with the
realizing the importance of innovation observation that their organizations’
in their efforts to gain mindshare, innovation initiatives were a by-product of
market share, revenues and profits. the overall business strategy.
30

34. Setting Out a Clear Innovation Strategy
96%
100%
75%
80 %
60%
40%
20%
4%
0%
Yes
No
Is Investment in Innovation Is there a Separate Department
Increasing? Coordinating Innovation?
83 percent of the respondents said 25 percent of the respondents said that
they were increasing investment in their banks were in the process of
creating a department responsible for
innovation while only 17 percent said
innovation. 75 percent were of the
that their investment was unchanged.
view that innovation was a shared
responsibility across departments.
Increasing Investment in Innovation
Bank of Baroda, YES Bank, Union
Bank of India and Lakshmi Vilas Bank
No, 17%
are among those considering creating an
independent department for innovation.
Yes, 83%
Many banks have committees or task
Yes
forces that drive innovation agendas.
Lakshmi Vilas Bank, for instance
No
has a board level committee that
spearheads innovation.
31

35. Creating a Department Responsible for Driving Innovation
80%
60% 75%
40% 25%
20%
0%
Yes
No
Are there Idea Generation and
Screening Procedures? Are Banks Providing Incentives for
Innovative Employees?
90 percent of the respondents said
that they had already set up or were in 92 percent of the respondents said they
the process of setting up idea generation had some kind of incentive scheme to
and screening procedures with respect recognize employee efforts, whether for
to innovation. innovation or performance. These are
Setting up Better Idea Generation Providing Incentives for Employees
and Screening Procedures to be more Innovative
No, 10% No, 8%
Yes, 90%
Yes, 92%
Yes Yes
No No
32

36. given as cash incentives in some cases, specific training could be provided to make
in kind in others, and as recognition or employees more creative or innovative.
mementoes in the rest.
Are Banks Investing in More
Are Banks Increasing Employee
Flexible IT Systems?
Training on Innovation?
59 percent of the respondents said they 87 percent of the respondents said
were increasing employee training in that flexible IT systems helped innovation
general and were also looking to increase and their banks were investing in them.
training to help them come up with The rest said that they could innovate
innovative ideas. The rest said that no despite inflexible IT systems n
Increasing Employee Training on Innovation Investing in More Flexible IT Systems
and Creativity
No, 41%
No, 13%
Yes, 87%
Yes
Yes, 59% Yes
No
No
33

37. Conclusion
The Indian banking sector is poised to welcome innovation from across avenues in the years
to come. Private sector banks and foreign banks, which are advanced users of technology,
will deploy advanced tools to mine customer data and build a host of innovations into their
products and services. They will also be looking to scale their channel and branch networks,
while devising new means of driving down transaction costs. Most public sector banks
currently deliver their innovations through branches as opposed to private sector banks
that deploy them over e-channels like ATMs and the Internet. Moving forward, public sector
banks, at least the bigger ones, will roll out large scale e-channels. Regional and other
smaller banks will customize their products and services for specific regional demographies.
Banks in India realize that innovation across all fronts is critical to their success in a market
place that is getting increasingly competitive. But, as this study reveals, there is a lot more
banks can do to make innovation deliver greater value to their business in the long run.
• Banks that have a strong innovation component factored into their business strategy
will emerge at the head of the pack. Their innovation agenda must take a lead from a
judicious mix of both local and international best practices.
• The right mix of incremental and strategic innovation is crucial for banks. While
employees across cadres can add value by engaging in incremental innovation,
significant management investments must essentially drive the fruition of strategic
innovation.
• Banks will benefit from augmenting their own innovation efforts to take customer
experience to the next level, by leveraging strategic partnerships and collaborations,
for the purpose.
• The innovation culture at the bank must be nurtured carefully and continuously,
through adequate training initiatives and with sustained efforts to create an
`innovation-safe' milieu.
• Innovation is a direct outcome of people directing energies to think innovatively.
Management at banks must focus on making innovation an organizational priority
and ensure that the agenda percolates down the ranks, without dilution.
In summary, a highly focused and objective approach to innovation will help banks hone
their operational efficiencies, deliver better products, take customer experience to the next
level and eventually drive growth and profits.
34

38. About Us
The Economic Times, launched in 1961, is India’s largest financial daily newspaper and the
world's second largest financial daily, with a circulation of over 620,000 copies. It is
published by India's leading media group Bennett, Coleman & Co Ltd, which also publishes
The Times of India, India’s largest English daily. It has also launched a 24 hour business
channel - ET NOW.
Infosys (NASDAQ: INFY) defines, designs and delivers IT-enabled business solutions that
help Global 2000 companies win in a flat world. These solutions focus on providing strategic
differentiation and operational superiority to clients. With Infosys, clients are assured of a
transparent business partner, world-class processes, speed of execution and the power to
stretch their IT budget by leveraging the Global Delivery Model that Infosys pioneered.
Infosys has over 100,000 employees and operates globally from 21 countries. Infosys is
part of the NASDAQ-100 Index.
Finacle™ from Infosys partners with banks to power-up their innovation agenda, enabling
them to differentiate their products and service, enhance customer experience and achieve
greater operational efficiency. Finacle™ solutions address the core banking, wealth
management, CRM, Islamic banking and treasury requirements of retail, corporate and
universal banks worldwide. Finacle™ solutions also empower banks with multiple
sales,service and marketing channels including e-banking, mobile banking and call
centers. These offerings make Finacle™ a strong innovation-facilitator enabling banks to
accelerate growth, while maximizing value from their large scale business transformation.
Finacle is the chosen solution in over 116 banks across 62 countries.
35