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Customer service bane of new banks: McKinsey

If proof was needed, it is here: your fancy new bank with glitzy advertisements and tall claims is not as good at customer service as old ones. Narayanan Madhavan tells more.

india Updated: Nov 26, 2007 21:35 IST
Narayanan Madhavan
Narayanan Madhavan
Hindustan Times

If proof was needed, it is here: your fancy new bank with glitzy advertisements and tall claims is not as good at customer service as old ones.

A comprehensive survey of the Indian banking system by global consulting firm McKinsey reveals that new banks including private and foreign ones lose out to old nationalized banks, which, while lacking in back-end facilities and technology, score big in reach and simple pleasures offered to depositors and small town customers.

The McKinsey Personal Financial Services survey profiled 13,000 customers in 12 Asian markets, of which it covered 5,300 in India in both urban and rural areas through elaborate interviews and 150 questions. This was one of five similar surveys that went into various aspects of Indian banks for a report titled, “India Banking: Towards Global Best Practices, Insights from Industry Benchmarking Surveys.”

“Customers of newer banks have experienced higher negative moments of truth relative to legacy banks,” McKinsey said in a statement. “The customer satisfaction level with financial institutions in India is the highest in Asia. However, it is significantly lower in the metros,” it said.

The survey surveys at 14 leading banks in India – 7 leading public sector banks, 4 renowned private sector banks, and 3 established foreign banks.

The survey reveals that Indian customers, apparently looking for freedom from bias, are interested in and willing to pay for financial advice. They are also the most sensitive customers in Asia and are willing to easily switch. Legacy banks need to manage their risks better, invest more in information technology and hire and retain key talent, the survey found.

“Newer banks have higher revenue per customer, driven by better cross-sell ratios and product mix,” McKinsey said, in a reference to activities like mutual fund and home loan offerings.

Indian banks are by no means weak. The survey findings suggest that India’s banking sector has performed well in providing high returns to shareholders, pumping in capital and ensuring a low level of non-performing assets (NPAs) – or loans that do not yield interest.

But there are costs that eat into profitability, it said.

“While the overall profitability of newer banks and legacy banks is on par at 15 per cent and 14 per cent respectively, the latter earn 33 per cent return on equity (ROE) on their retail businesses compared to an average of 16 per cent by the former, a result of their legacy deposit franchises,” the statement said.

“On the other hand, legacy banks earn 9 per cent ROE on their remaining businesses as compared to 15 per cent ROE by newer banks,” the statement said.

First Published: Nov 26, 2007 21:33 IST