Bank interest margins seen under pressure over next 10 years

Margins of banks could be under pressure in the next decade as the wholesale debt market deepens and corporate customers access them directly, said a report by the Boston Consulting Group (BCG).

Fee income will be a key driver of profitability, half of public sector banks and 9% of private sector banks which took part in the survey conducted by BCG and the Indian Banks’ Association said.

"The net interest margins of the public sector banks has consistently declined and this perhaps reflects in the pessimistic view on future margins adopted by the public sector," the report  said.

Meanwhile, public sector banks have doubled their revenue per employee in the last three years and their productivity now is comparable to that of private sector banks, the report said.
For the first time, the average cost per employee in the public sector has surpassed that of the private sector.

“Starting 2010, the average cost per employee in the public sector is Rs5.6 lakh per annum, higher than the private sector average of Rs5.3 lakh per annum,” says the BCG report. About 62% of the costs at public sector banks comprise staff costs as against 37% in the private sector. Globally, this ratio is about 50%.

The report suggests that the new business model requires additional skills be devoted to sales and customer service. “The percentage of employees in public sector banks involved in sales is very low,” said MV Nair,  chairman and managing director, Union Bank.

Union Bank has 7% of its branch staff involved in sales. It aims to take this up to 25-30% in 2 years. The bank recruited 2,000 people last fiscal and is in the process of adding another 2,500 this fiscal.

“New recruitments will be in front office and sales, thus improving the revenue generating capability.  Seniors will be moving into central processing hubs,” said Nair.

Bank of Baroda, which added 3,500 people last fiscal is adding the same number this fiscal too. Currently, it has 5-7% of branch staff engaged in sales and marketing. “The immediate endeavour would be to step it up to 20-25%,” said M D Mallya, the bank’s chairman and managing director.

The report stresses addressing HR issues in public sector banks, without which, it says, they will not be able to meet the challenge of financial inclusion in any meaningful manner. “More than 5 lakh employees need to be recruited by public sector banks by 2020,” said Saurabh Tripathi, partner and director, BCG.