Cross-selling by Public Sector Banks

Prameyanews English

Published By : Prameya News Bureau | November 07, 2020 IST

The appetite of the Indian population for insurance is increasing, especially after the pandemic; increasing number of people are migrating to mutual funds as they find bank deposits no longer attractive enough; and direct participation in capital market is on an uptrend. In view of the above, the focus on cross-selling by banks should be reinvigorated. Dr Manas R Das Cross-selling or selling of non-bank or third party products or services appeared on the Indian banking scene in the 2000s. The objective was to supplement the then declining interest income or Net Interest Margin (NIM) by increasing the non-interest or fee income, without evoking any charge on the capital. Basically, banks sold insurance – life and general (including health) - and mutual fund products. Sale of bancassurance products also included those under government-sponsored schemes. Although two decades have elapsed, cross-selling business by banks, especially by the Public Sector Banks (PSBs), remains lacklustre. During 2019-20, the 12 PSBs earned, on an average, Rs 2.5 billion per bank from cross-selling to which the State Bank of India (SBI) alone contributed 68%. Excluding SBI, the average drastically reduced to Rs 0.9 billion. By contrast, the 10 ‘New’ Private Banks (NPBs) earned, on an average, Rs 6 billion per bank out of which 85% sourced from three banks, namely, Axis Bank, HDFC Bank and ICICI Bank. Excluding these three, the average turned out to be Rs 1.3 billion. In the case of PSBs (including SBI), cross-selling income contributed 8.4% to fee income (i.e., “commission, exchange, brokerage income”), which dipped to 8.1%, without SBI. Contrastingly, the NPBs earned 11.7% of their fee income from cross-selling (including the aforesaid three dominant banks) and 6.6% without them. Even allowing for differences in regulatory treatment between PSBs and NPBs, the above-analysed performance ‘dichotomy’ is reflective of the PSBs’ easy attitude towards cross-selling. However, given the financial conditions of the PSBs today, increasing the cross-selling income needs to be considered as a ‘necessary virtue’. The situation existing today is no different from that existed during 2000s when banks went for cross-selling. The PSBs are continually in need of capital; interest income (and NIM) is under stress; and non-interest income (and ‘Burden’) is downwardly sticky. However, there have been some healthy developments in the interregnum. The appetite of the Indian population for insurance is increasing, especially after the pandemic; increasing number of people are migrating to mutual funds as they find bank deposits no longer attractive enough; and direct participation in capital market is on an uptrend. In view of the above, the focus on cross-selling by banks should be reinvigorated. Spurring PSBs’ Engagement At the corporate level, the PSBs need to accord ‘explicit’ recognition to cross-selling as a ‘main line’ revenue generator and create a ‘dedicated’ vertical for this purpose. Non-bank products are genetically ‘push’ products, and the markets are fiercely competitive with several established and specialized players, including nonbanks. Moreover, the regulatory playing field is skewed against the PSBs in some respects. Therefore, the PSBs need to generate the required marketing thrust by establishing a dedicated army of staff with relevant qualifications and special skillsets, to be bolstered by bank-specific training, instead of routine staff postings. Remuneration must be a judicious mix of salary and performance-linked incentives.  There is innate, howsoever denied, resistance among the PSB staff as to why they should sell nonbank products in preference to banking products, in which they are adept and which gives them their living. Thus, mindset changes are necessary through appropriate incentives and motivational training so as to iron out incompatibilities between bank and nonbank cultures. For example, Bank of America lost Merrill Lynch brokers because the former ‘insisted’ that the latter sold bank products to their investment clients. Mis-selling in non-bank businesses is common and a global phenomenon, and attributing it to higher commission alone would be strategically wrong. One of the most significant, empirically observed factors is pressure from CXOs on the sales force to achieve targets (e.g., Wells Fargo ‘misconduct’ of 2016 in pursuance of their “Good to Gr8” strategy). Moreover, in the Indian context, routinely posting unskilled personnel as sales agents and their lack of comprehensive product knowledge, especially while simultaneously handling both banking and cross-selling; no customer discipline on agents; financial innumeracy about non-bank products which are more complex than banking products; and inadequate grievance redressal systems instigate mis-selling. Therefore, efforts must be made to ameliorate these, instead of annulling incentives. Ultimately, the PSBs need to decide whether to diversify into nonbank businesses or not. Increased digitization, coupled with the avalanche of techno-financial innovations, will, slowly but surely, open new vistas for cross-selling. However, in order to capitalize on these, the PSBs must have specialized and dedicated manpower, and appropriate incentive structure and quantum. About the Author:Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medallist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of Indian Institute of Bankers. He has won several awards, besides being a prolific writer.

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