BNP Paribas Global Expansion Strategy Analysis
BNP Paribas is a leading French bank and it has the second largest bank position in European market for its retail banking operation. The bank has operation in many countries in the world and now it is planning to expand its business to other countries. The report aims to identify the target market, to do macro analysis of target market, critically analyze the key strategic issues and recommend actions.
Potential target market identification
Retail banking refers to having transactions directly with the customers than corporations or other banks and considers transactional accounts, mortgages, personal loans, debit cards and credit card.
Choosing the India as a retail banking operation has a reason that shows that ratio of consumer loans in comparison with the GDP of country is at a low 11 percent and the demand for the loans are for housing and auto loan. These findings suggest that there is huge untapped market for retail banking operation in the country. Also the retail banking operation in the rural areas of country are also attractive. It is predicted that companies can gain from the advancement in technology, from flexible laws for serving rural customers, from social awareness of customers to seek one stop solution from the financial institution, and from ability to deliver mobile based delivery model due to high penetration of mobiles phones in rural areas.
It is revealed that India has a great potential for retail banking. Urbanization of country is growing very fast and this has resulted in the significant growth of affluent segments. The discretionary income of Indian people has also been increased. The wealth creation is another factor for emerging market that allures the banking companies to invest in India and the consumption is also doubled (Nair, 2012). Indian population is huge and there are crores of people who are entrepreneur or salaried people and they can be the better options for retail banking. Also there is sizable portion of NRI and this also attractive market. So the overall picture of Indian market is very attractive. In this regard, the market potential of India is assessed.
The ever increasing middle class segment and their rising income level, certain demographic changes that supports the retail banking industry, these have boosted the demand for retail credit for banking industry. The increasing consumption of the Indian customers and their sophisticated life, mall culture also has promoted the retail banking prospects in India. There is strong growth in the service sector and particularly in the IT and ITES sector. The organized sector has employed greater numbers of people. Reforms in the financial sector and regulatory changes have favoured the retail banking industry.
As far as the Indian banking sector is concerned, it is least affected because of robust policy of RBI. The role of RBI ensures that Indian banks can have more power against the defaulters who take loan. There are stricter prudential rules and regulations with regard to capital and liquidity provides Indian banking industry more credibility. The move is taken to increase the FDI limit from 20 percent to 49 percent is a welcome move for the foreign banks as they can have more opportunities to establish their business in Indian market. The ceiling for the FII investment was also increased. Agriculture has been the mainstay of Indian economy and it is growing 4 percent per annum. This provides better opportunities for the banking sector to spread its presence in rural sector.
As far as the GDP growth of India is concerned, it is predicted that the Indian economy will be a leading economy in the world by 2020. One of the important findings about the Indian market are that most of the people of India are young and they constitute a large market for the retail banking industry so India is a viable option for expanding the retail business operation.
The overview of the Indian banking sectors presents significant information. There are four trends that have affected in the past and they are still relevant. First is the consolidation of players by the mergers and acquisitions in the banking sector. Second are the globalizations of operations. Third is the development of new technology and the fourth is the banking universilization. The products are customers specific and tailored according to the needs of potential customers in the retail banking. The marketing strategies adopted are generally for the specific customers or niche markets and these are evident in the retail banking sector. Some bank consider the credit card and mortgage products for promotion of business and some other consider the particular segment of business system. The performance of the banking sector is impressive and if compared to other economies on various parameters such as cost to income ratio, non performing asset level, fee income, net interest margins, profitability, and valuations. Indian banks are performing well. There is a transition taking place from class banking to mass banking and banks are more focused towards serving the customer needs. There are new channels available for banks such as mobile phones and ATM that also has increased the performance of retail banks considerably (Sharma, 2012).
The estimates show that the GDP is likely to rise by 7.3 percent in fiscal year of 2014/15 and it is higher than the 6.9 percent of 2013/2014. The private consumption has also been increased and it is predicted to be 7.3 percent in 2016 than 6.9 percent in 2015. The change is agriculture is 3.8 percent predicted in 2016 compared to 3.2 in 2015. The government has planned to consume less resources and the consumption will be predicted to be 9.3 percent in 2016 than 12.4 percent in 2015. The expenditure on GDP shows that industry will have changes of 6.1 percent in 2016 than 5.4 percent in 2015. Another report presents that Indian economy is predicted to grow at 7 percent in 2015. It is revealed that most important and fastest growing sectors of Indian economy are services, insurance, hotels, trade, transport and communication, and financing. In the year of 2012, the growth of the financial sector was 7.9 percent along with the growth of insurance, business services and real estate. The manufacturing sector had 2.5 percent output and the construction sector had 5.8 percent output. These findings suggest that Indian retail banking sector has lots of opportunities in the Indian market. The reason for choosing the Indian market for retail banking is that there are many countries where the GDP growth is not attractive such as Australia where the GDP growth is 0.90 percent, China where the GDP growth is 1.70 percent. Germany where GDP growth is 0.30 percent and in these countries the company BNP Paribas operates but India provides an attractive market because India has registered impressive 4.10 growth rate. According to the “heritage.org” the country has 5.1 trillion GDP and has registered 4.4 percent of growth. There is 6.9 percent compound annual growth. The income is $4077 per capita. The unemployment rate is 3.7 percent. Inflation is 9.5 percent. FDI inflows are $28.2 billion. If economic freedom is concerned, it is 54.6 and it is the world’s 128th freest economy. There are modest improvement in the area of business freedom, property rights and corruption freedom. India is ranked 26th among the 41 countries in the Asia-Pacific region and its score is below than regional and world averages. If the tariff rate on India is taken under consideration it is 7.7 percent. There are significant numbers of non-tariff barriers that interfere with flow of goods and services. The procurement policies of government favour the local companies. There are interferences in the financial sector by the states and the government retains considerable ownership in banking sector. There are issues of nonperforming loans as well that is relatively high.
The Banking sector in India is highly regulated and sufficiently capitalized. The credit, liquidity and market studies have found that Indian banks are more resilient. Retail banking is growing up and there is growing trend to carry transactions through debit and credit cards. It is also identified that FDI has been increased in the banking sector and in the private banks and it is 74 percent via the automatic route. The RBI has a commanding role in retail banking sector and controlling inflation rate, and exchange rate, it plays an important role. RBI lowers the interest rate to curb the inflation rate and increases the demand for the retail banking.
International trade of India is not very encouraging but there are expectations that on the long term, there will be growth of 6 percent in international trade. The rising export from India enhances the income capacity of target customers and they will become frequent users of retail banking services. Similarly effects of globalization has brought many changes in Indian economy and there is rising middle class with high discretionary income and there are rising upper and lower class as well and retail banking sector has opportunity to provide specific products according to their needs.
It is also important to consider the vision of Indian government. The vision of 2020 envisages that India looks for to achieve its current position11th to 4th in terms of gross domestic products. For this purpose, Indian government is committed to achieve an 8.5 percent to percent in coming 20 years. The vision also focuses on to improve the percentage of urban population that should be 40 percent. Also share of agricultural sector is planned to be reduced and focus of services sectors will be more. The vision of India presents that international trade should constitute 35 percent of the GDP.
The country has limited governance. The fees for business registration have been reduced significantly and completion of licensing requirements has been improved. Data of 2009 presents the fact that starting the business in India takes less time than china or Brazil. Government of India has removed many barriers to obtain export from the other countries.
If the population is taken under consideration India has a huge population that is 1,236.344.631 according to July 2014 estimates. The age structure of India is very attractive for retail banking. 18.1 percent females and males are in the age category of 15-24 years and 40.6 percent females and males are in the age category of 25-54 years. So India has a younger population. This young population has several needs such as loan for housing, personal and other purposes. They are also active users of debit and credit cards facilities retail banking sector offers. The median age of total population is 27 year that is the ideal image for the retail banking business. India has a good population growth as well. The urbanization is taking place with good speed and rate of urbanization is 2.47 annual rate of change according to the 2014-15 estimates. The urban population is 31.3 percent of total population but as the Indian population is huge the urban population provides a big market to cover. There is also a vast rural market and the rural market opportunities are untapped. Literacy rate has a direct relationship with the improved life style and it helps to lead a sophisticated life. India has a literacy rate of 62.8 percent of total population and this is a good benchmark to assume that Indian people lead sophisticated life or want to lead and they surely use the retail banking services. The perception of Indian people may be the obstacle for the new company to establish business as they believe in references of people.
Technology in India is growing very well and for improving the technological environment, Indian government has taken important steps. Indian government has established the technological and research institutes. There are 500 technological institutes that provide education to Indian students. There are 1080 research institute. The major names are medical research centre. Space research centre and agricultural research centres. Indian government has a strong and positive policy for technological development. The Indian IT sector is growing with 35 percent and India is the second country that uses the internet at large scales for e-education, e-commerce and e-education. Indian government provides 100 percent exemption in income tax for expenses that incurred in research of technology in India. All these findings reveal that India has strong technological environment and that can support BNP Paribas to expand its business operation in India.
The key factors that drive the retail banking in India are mentioned. There is a shift from manufacturing sector and agriculture to service sector. The banks have now focussed towards the retail assets particularly in housing finance to deploy the funds. The rise of middle class income contributes to the development of retail banking. Emergences of the IT sector and supply chain management have created new income opportunities. There is conducive role of reserve bank of India in terms of inclusion of housing loan, reduction in capital adequacy ratio, deregulation if interest rate structure, lowering of SLR and CRR. The government has provided a catalyst role and tax exemptions are offered for interests on capital borrowed for buying of house/ property, and repealing of the urban land. There are many initiatives taken by the bank industry for modernization, lowering the interest rates for loans, tying up with the insurance products, and waivers in the processing fee has resulted in growth in retail banking.
Strategic issues for business expansion
The issues are so many even if the Indian retail banking has performed well in recent years.
- There are challenges and issues from the customers’ expectations that are rising constantly. The people expect a rapid growth, inclusive growth, wealth creation, quality infrastructure, worlds class banking infrastructure and access to basic banking facilities, better living standards, plenty of jobs and trickling down of wealth. All these demands of customers make retail banking a challenging task.
- Second issue is the customers’ mindset as they have deep loyalty with the existing banks and they are brand followers. So establishing name in the Indian market can be difficult for the BNP Paribas even if it has a strong presence in developed and developing countries.
- There are challenges from the government banks that are protected by the regulators and company has to overcome from this challenge.
- There is an issue of nonperforming assets that is high in Indian retail banking and company has to consider this fact as well to conduct its business operation.
- There is tough competition prevails in the Indian retail banking market and there are many banks offering mortgage loan and they have their own networks and cracking their local network may not be easy for PNB Paribas.
- There are the issues of basic infrastructure such as transportation facilities and electricity facility and due to that Company may face issues in setting up the ATM in various places
- Similarly the mobile banking cannot be possible without the internet presence and in India still the penetration of internet and broad band access to semi urban areas and rural areas is low.
- There is growing dissatisfaction of customers on private banks processing fee and other charges. Their needs to have good customer service, fast approval of loans and complete product range are still missing and this perception of customers may create initial hindrances for company to expand its business in India.
- Due to lack of infrastructural development and inability to expand the business in rural market, banks are unable to target the rural market of India quite well and the lengthy procedure of taking loans, illiteracy of Indian people and availability of easy loans by other means have hampered the expansion of banks operation in rural areas. PNB Paribas if has to gain the maximum potential of market, than it has to address this issue as well.
- The issue of having the skilled work force that can be efficient in adoption and integration of technological processes persists in Indian retail banking and company has to face difficulties in sourcing candidates with adequate competency to manage technology adoption.
- The data management regarding the customers of banks and support of regulatory authorities in this case is still a issue due to that adequate data may not be generated about the customers.
- As far as the issues for entering the Indian market is concerned, company has to face the rigid and complex social structure of India, and Indian bureaucracy as well as infrastructural issues. The functioning of company operation can be affected with the nepotism and red tape in India so the company has to take required steps to mitigate these issues.
Actions suggested for BNP Paribas
- Company should identify the entry mode in the Indian market. It is suggested that company should merge with an Indian company to explore its business in Indian market. There are many MNCs that have entered in to Indian market by joint venture and this is a good move to capture the Indian market because the Indian name is recognized name for Indian customers and they can be easily persuaded to purchase the products and services of company.
- Company must hire the competent work force that should be able to adopt the advanced technology to serve Indian customers better.
- For tapping the rural market, company should build networks in these areas to attract customers and provide innovative models to persuade rural customers. Company must streamline its loan processes and other processes for Indian customers.
- Company should have excellent customer service and proper understanding of needs of Indian customers to offer full range of products and services to them.
- Company must find a way to address the under utilization of data base system prevalent in Indian retail banking industry and must be able to cross sell across the banks.
- It is found that there are lack of marketing thrust and higher dependency on walk in business. Company must find ways to reduce the dependency on walk in business and there should be sufficient marketing thrust.
- Company must tap the changing preferences of Indian customers and must provide customers with new products and services.
- There are cases of dub utilization of the available technology and company must use the technology judiciously to expand its business operation in Indian market.
- Company must develop market intelligence by implementing a proper market research to create and maintain a huge and updated data of customers so that it can offer those customized products and services.
- Company must devise strategies for cost management by tying up arrangement with other players in the volume chain, resource sharing with different players in the ATM facilities and creating in house facilities to minimize the transactions costs.
All these actions taken by company can help it to improve its performance in Indian market and company can expand its business in urban and rural market.
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