KNOWLEDGE BANKING : AN EVOVLVING

CONCEPT

Submitted in partial fulfilment of the requirements

For the award of the degree of

Master of Business Administration

in

Software Enterprise Management

Under the guidance of

Mr. Amit Kr. Gupta

ERP Consultant

Centre for Development of Advanced Computing, Noida

Affiliated to

Guru Gobind Singh Indraprastha University

Kashmere Gate, Delhi - 110006

ABSTRACT

The project work is about an in depth study of an evolving concept “KNOWLEDGE

BANKING”. The concept originated from THE WORLD BANK and was brought in

India by YES BANK. The requisites for a bank to become a knowledge bank are

being discussed and it also demonstrates how this concept can help the banks to

differentiate themselves from other banks in such an overcrowded sector of banking.

It is discussed that the bank needs to redefine its strategies and processes in order to

gain competitive advantage over the competitors. There is a need to adopt new

technologies and hire and train the human resources efficiently to gain as well as

sustain this advantage.

Then the opportunities for banks in SMEs are explored. The banks should focus on

the SMEs as the market with larger enterprises is now near saturation. The approaches

that the banks should adopt to serve the SMEs are also mentioned. At the end, the

case studies are discussed to show how knowledge banking can be used to get the

competitive edge over the other banks in the market. The study also focuses on

introducing cutting edge technologies into the banking organizations and the role of

customer knowledge as well as market knowledge to acquire new customers in the

market and at the same time retaining the already existing customers by providing

them with the customised financial solutions to cater to their needs in the best possible

manner and creating a knowledge bank in the form of expert human resources and the

database of the customers.

CHAPTER 1

INTRODUCTION

INTRODUCTION

1.1 OBJECTIVE

1. To understand why and how Banks should introduce the concept of

Knowledge Banking.

2. To find out if the small and medium enterprises (SME) can be banked

profitably, and is the market today an attractive one.

1.2 SCOPE

To have an in depth understanding of the Knowledge Banking concept and

approach.

To explore the benefits of the knowledge banking on the SMEs.

To study and find out the ways to develop an effective knowledge bank.

1.3 RATIONALE

India is well positioned to become the fourth largest economy in the world by 2025.

GDP growth rates 7-8 percent every year will be sustainable growth forward if key

enabling factors have been put in place. One of the enablers of robust economic

growth is a banking sector that is able to adequately and efficiently meet the needs of

a growing economy. With the changes in the economic scenarios, there have been

many positive developments in the Indian Banking Sector. A few banks have

established an outstanding track record of innovation, growth and value creation. This

is reflected in their market valuation. But still all these things are limited to a very

small part of the sector. Banks in India must strengthen themselves significantly to

support the modern and vibrant economy which India aspires to be. The failure to

respond to the changing market realities will stunt the development of financial

sector, a weak banking structure will be unable to fuel continued growth, which will

harm the long-term health of the economy. The inability of bank managements to

improve capital allocation, increase the productivity of their service platforms in their

organizations could seriously affect future performance.

The success of the management will be determined on three fronts:

1. Fundamentally upgrading organizational capability to stay in tune with the

changing market

2. Adopting value creating M&A as an avenue of growth

3. Continually innovating to develop new business models to access untapped

opportunities.

After understanding the current economic scenario and in an attempt to respond to

them efficiently and support for the financial growth, the banking sector has come up

with an innovative idea of KNOWLEDGE BANKING.

CHAPTER 2

LITERATURE

REVIEW

2.1 KNOWLEDGE BANKING

Banks already hold an enormous amount of customer information, and this is perhaps

not currently used in the most advantageous way to offer customers better advice and

better service. The main issues stem from having the right information, in the right

place, at the right time. In many banks the customer advisory and relationship model

is based around the branch. However, customers are increasingly demanding a multi-

channel advice model. There is considerable scope for banks to offer a more

integrated customer advice service which is available across all distribution channels

and makes the very best use of customer knowledge and product knowledge available

within the bank. The Council members accept that banks are currently weak in this

area and significant improvements are required. In Knowledge Banking, the banks

intend to provide their customers with knowledge driven and industry specific

solutions that are customized to best suit their business needs. So, in their team of

bankers they involve the industry experts of certain sectors who can offer an in depth

knowledge and invaluable insights into the client‟s business. IT systems are

instrumental for acquiring and maintaining knowledge in an organization. Banks may

invest large amounts of money in systems but a system will not be useful if they do

not know what information they should be getting out of it and how the knowledge

thus acquired can be useful for the bank.

EVOLUTION OF KNOWLWDGE BANKING

In 1996, World Bank president James Wolfensohn announced a change in the way the

bank would accomplish its unchanging mission of reducing global poverty. He

contended that the bank should become a knowledge bank, as focused on disbursing

the knowledge assets poor and developing countries needed as it was about providing

economic support for development projects. Until then, the World Bank thought of

itself mainly in traditional banking terms. Its officers had considerable knowledge of

economic development that they used to help define and evaluate projects, but that

knowledge was generally considered secondary to the organisation‟s financial assets,

a tool for deciding how its capital should be employed. At this time, economists and

business thinkers were describing the birth of a new global economy, where

knowledge was outstripping material resources and capital as a source of wealth.

Taking heed of these predictions, Wolfensohn asserted that the knowledge the World

Bank accumulated through its participation in development projects around the world

was as valuable as, or indeed more valuable than, its financial resources. Knowledge

was a powerful poverty-reduction instrument in its own right. Putting it to good use –

getting it to the bank officers and clients who needed it when they needed it – would

require a new definition of the bank‟s assets, new mechanisms and behaviours, and a

complex set of changes in how the bank thought and functioned. The idea of the

knowledge bank was revolutionary, but the process of creating it proved to be more of

an evolution. The concept was called the Strategic Compact and included plans to

shift resources from administration to front-line operations, develop new financial

products and advisory services, decentralise activities to the field, and strength the

creation, sharing and application of knowledge.

Seven years after Wolfensohn articulated this vision, the bank‟s 2003 Knowledge

Forum was an opportunity to evaluate its progress and discuss what remained to be

done. Carla O‟Dell, president of the American Productivity and Quality Centre and

one of the forum participants, defined five stages of knowledge sharing:

Vision

Strategy

Pilot projects

Expansion

Institutionalisation

She noted that the bank was now well on its way to the fifth stage.

In order to transform itself into a knowledge-focused organisation, the bank began to

apply recently developed knowledge-management ideas to its structures and practices.

The bank acknowledged the critical role of communities of practice in knowledge

creation and sharing. Business thinkers and practitioners, most notably John Seely

Brown of Xerox and Etienne Wenger of the Institute for Research on Learning, have

concluded that the best way to develop and communicate knowledge is through

informal groups of people brought together by related work. Knowledge moves

poorly, if not at all, between groups and individuals that lack these work-based social

connections. Understanding the importance of communities helps explain why so

many efforts to create large, knowledge-exchange systems in global organisations

have failed. Having built electronic-document repositories and web-based

communications structures, many companies have found that the expected flow of

valuable ideas was but a trickle at best. A second factor behind the disappointing

performance of these systems is that they often collect information of little or

moderate value and fail to communicate real know-how, that is, the mainly tacit and

context dependent knowledge that matters most to effective work. Expertise locators

are successful knowledge systems that connect people rather than repositories of

captured (and therefore reduced) knowledge. As O‟Dell says, people want knowledge

from people not from databases. Taking the importance of communities for

knowledge exchange to heart, the bank focused on supporting and developing its

communities of practice (known internally as thematic groups). Modest funding for

communication, face-to-face meetings and official recognition stimulated community

growth and activity. Not surprisingly, given the informal and self-selecting nature of

most communities, those that had already existed proved to be more robust and

effective than those built from scratch, but communities of both types grew. By 1999,

some 120 thematic groups existed in the bank and communicated via intranet,

newsletters and at periodic meetings. The combination of thematic groups and web-

based-communications technology made rapid, effective knowledge sharing possible

and demonstrably improved service to clients. The discovery that knowledge can be a

more productive or profitable form of capital than material resources or money led

some knowledge-era prophets to discount these other forms of capital entirely.

Probably the most radical element of the knowledge-bank vision, one that has become

more explicit over time, is the idea that the local knowledge of the people the

organisation helps is invaluable. As Wolfensohn said during the 2003 Knowledge

Forum, “Eight years ago, the bank thought it didn‟t have a lot to learn from poor

people, from indigenous people.” Traditionally, the bank thought that the important

knowledge was „the brain on the plane‟: the bank officer or consultant who flew into a

country to give locals the benefit of their superior expertise. This typically defined

both the „what‟ and „how‟ of bank-supported projects. The expert and the organisation

had long believed in the unique value of certified expertise and the control it implied,

and found it hard to give up, especially in favour of local and traditional knowledge

whose value was discounted by academic institutions and development communities.

Knowledge, however, develops in a local context, on the factory floor or hospital unit.

Essential expertise often resides in the practices of workers whose knowledge

contributions have frequently been devalued. For example, the experiences of

assembly-line workers or nurses have given them crucial knowledge that formal

training, manuals or textbooks cannot provide, or, in the case of bank‟s clients, the

traditional indigenous practitioners of a whole range of skills. In response to this

realisation, the Indigenous Knowledge Programme in the bank‟s Africa region aims to

tap and adapt this knowledge. The programme has developed a database of more than

200 indigenous/traditional practice notes, synthesising local knowledge in areas as

diverse as education, health, agriculture and the environment. It also documents

instances of how traditional knowledge is integrated into the design of the bank‟s

operations. The content on the programme‟s website is available in a variety of

languages including two African local languages, Swahili and Wolof. Because

indigenous knowledge is typically tacit – experiential, embedded in practice,

transmitted orally – the bank has established 15 Indigenous Knowledge Centres

across Africa to support learning and sharing.

Challenges Faced

The fundamental challenges, inside the bank and in relation to its clients, are social

and cultural:

building trust and mutual understanding,

fostering the will to help and the willingness to be helped

Transforming How The Bank Works

The bank‟s ambitious goal – to be a source and conduit of essential knowledge for the

developing world – also has an element of humility to it. By becoming a broker for

knowledge created by others and a partner in development rather than solely the

source of development assistance, the bank willingly gives up some of its traditional

control and with it, possibly, some of its status. “We know best and we have the

money,” articulates a powerful position. Willingly giving up power is rare and

difficult. The temptation to control and the difficulty of maintaining flexibility are

real, and centralised power often functions more smoothly and efficiently than

distributed decision making, if not more effectively. Paradoxically perhaps, the more

successful the bank is as the knowledge bank, the less credit it may get for its

accomplishments: as clients and partners shape and control the work done in their

areas, their reliance on their own learning and the knowledge they get from the bank‟s

other clients will increase. In many organisations and situations, brokers and

facilitators get less credit than they deserve for making things happen. On the other

hand, those partnerships and the effective use of the bank‟s knowledge will be

essential to achieving the goal of reducing poverty throughout the world.

2.3 CREATING A SMARTER KNOWLEDGE BANK

All Banking Advisory Council members want to see major progress in creating the

smarter knowledge bank. Whilst they have different views on developing a strategy

to achieve this objective, there is a common view about the end state they desire. The

following summarises the type of retailing experience that banks hope they will be

able to offer in the not too distant future:

Ease of access: 1 click – 1 call – 1 visit

Simple products that are easy to understand

Clarity of product information

Simple, easy-to-understand advice available through all channels

Clear options and guidance

Simple buying instructions – no necessity to use a branch for any product if

you do not want to

„Know me as a customer‟ – high quality customer profiles

Offer the appropriate next best product at the right time

Make recommendations based on understanding customer needs and

individual user behaviour.

High quality security and authentication approach

Follow-up service and the right to cancel

Customers can use whichever channel they prefer with no deterioration in

service or advice quality

Earning the trust and loyalty of the customer.

In practice, banks will develop a range of different advisory intelligence models

aimed at different segments and utilising various channel options. This is due to the

fact that capabilities in collecting and utilising advanced customer intelligence vary

considerably across Europe. In many cases, banks have different approaches to

segmentation and varying degrees of knowledge of current and potential customer

profitability. The extent to which they will focus on a branch-based relationship

manager advice model will also vary across India. Banks will need to decide on the

level of investment required to develop the following capabilities in order to offer an

acceptable level of customer advice:

Customer intelligence knowledge

Customer intelligence and data mining technique and utilisation at the point

of customer contact

Coordinated customer, product and market data

Segmentation and customer profitability analysis

Support tools for advisory staff

Training and communication skills for advisory staff

Enhanced advice capabilities for non-branch channels.

2.4 AREAS OF FOCUS

Areas where the banks should focus so that they can create a knowledge bank are:

1. Developing a New Customer Advisory Model

2. Using Customer and Business Intelligence to Maximize Performance

3. Introducing New and Harnessing Existing Technology

4. People Enablement

5. Operationalisation

2.4.1 DEVELOPING A NEW CUSTOMER ADVISORY MODEL

The term „advice‟ is a frequently used word in retail banking but can mean many

different things to many people. Customers perceive quality advice as being timely,

informative, easy to access information on products and services available to them.

This advice should be based on a clear understanding of their individual needs and

„expert knowledge‟ of the products available. Finally, the customer requires easy

access to someone with whom they can discuss and receive advice.

Another important issue is the distinction between selling and advice. A financial

services regulator in India has recently suggested that banks should avoid using the

term „adviser‟ in some job titles and replace it with the word „sales‟.

The following issues lie at the heart of creating a new customer advisory model:

1. A better understanding of customer preferences and the type and level of

advice required. Taking account of the manner in which customers want to

receive advice will become increasingly important in deciding which advice

model to provide.

2. A deeper understanding of customer profitability and potential. Segmentation

of the customer base will provide a key guide to future banking advisory

models. Some banks will segment the provision of advice by current and

future customer profitability, others by lifecycle, eodemographic and age/job

profile. No one segmentation criterion is likely to be predominant but

customer profitability, and cost pressures will inevitably make it more difficult

for banks to provide personalised direct contact advice to all types of

customers.

3. Creating better support tools for advisory staff so they have easy access to

personalised and integrated customer data which enables them to offer more

customised advice.

4. The ability to provide a multi-channel advice capability. Providing quality

advice through online and direct channels is one of the largest challenges

facing the Council members. Many are looking to develop a personalised

online presence with more self-help tools to create a user-friendly interactive

advice environment.

5. Improving interconnectivity between channels will become increasingly

important particularly the link between online and face-to-face channels.

Banks that can quickly assist customers who wish to switch from self-help to

personalized face-to-face or direct voice contact will gain a competitive

advantage.

6. Key advisory roles are likely to emerge in banks. For many banks the

relationship manager will be the key advisory role. As a result, considerable

resource needs to be invested in making sure the relationship manager is

provided with the right level and type of customer information to provide

quality customer advice.

7. Increasing regulation and the requirement for detailed product knowledge is

making it difficult for banks to offer a single source of advice.

However, the relationship manager will be a key gatekeeper and point of contact with

the customer to „direct‟ them to the best sources of knowledge and information.

1. Regular dialogue and communication with customers is seen by many Council

members as a prerequisite to collecting the necessary information, personal

knowledge and insights to be able to understand customer needs and

requirements.

2. Customers are likely to turn to other sources for advice, including search

engines, social networking sites and blogs in the absence of a clear point of

contact or source of knowledge. The use of these sites and channels has

increased substantially and is likely to play an increasing role for customers

seeking advice on financial matters. The key question banks have to ask

themselves is how they can provided a value added trustworthy service which

customers will want to utilise – not to what extent they can prevent customers

seeking self-help through online and non-bank channels.

3. Increased product knowledge, a simplified range of products and better

collection and usage of customer intelligence are all key steps – at the

frontline, in a branch, through a call centre or online – for banks to provide an

enhanced and value added customer advisory model.

4. The solution lies in segmentation, and for most banks this will mean only

providing face-to-face advice to a limited group.

2.4.2 USING CUSTOMER AND BUSINESS INTELLIGENCE TO

MAXIMIZE PERFORMANCE

The first step in building better advice models is to collect relevant customer data.

Many Council members feel they already have the data they need but are not using it

effectively at the frontline. The second task is in deciding what data to collect from

which customers and what methods to use to do this. There are very split views in the

Council membership as to how much to rely on the branch to achieve this. A number

of success stories have already been reported by Council members in successfully

collecting quality customer information through non-branch channels, and further

effort is likely to be invested in this area (not least because the relative cost is much

lower than using branch methods). We are likely to see the greatest disparity between

banks in terms of how they utilise their existing customer data. Although banks will

have the same access to future technology that will assist them in this task, the skills

and capability of both central data analytical staff and frontline staff in utilizing the

data is where the key differences will be seen. As this becomes more noticeable there

may be strong competition to recruit and obtain the services of high quality customer

insight, intelligence and data mining staff.

For the future, a combination of experienced central customer insight and data mining

teams working closely with frontline branch or call centre staff, who are highly

trained and knowledgeable about how to collect and use this data to provide best

advice, is likely to pay considerable dividends for those banks investing in these two

core capabilities

2.4.3 INTRODUCING NEW AND HARNESSING EXISTING

TECHNOLOGY

Banks therefore need to accumulate valuable customer data in a single repository,

have the capability to analyse this information to obtain indepth knowledge of

customer needs, and provide that knowledge to frontline staff. With the right

technology, banks will be able to provide a better and more consistent level of

customer service and will be able to manage their business with realtime analytics and

performance management.

The following technologies are required to develop the new customer advisory

intelligence model:

Service-oriented architecture

Business intelligence

Customer relationship management

Unified communications

Mobility

Service-oriented architecture

Without a foundation to build loosely coupled services, banks‟ IT infrastructures are

required „communicate‟ with other services in very specific ways via each individual

channel. This creates a costly complex infrastructure with multiple silos of

information that are difficult to maintain and adapt. Banks need to implement a

serviceoriented architecture to integrate disparate channels and create an agile

infrastructure where back-end systems can be exposed to new services and channels

as they emerge or evolve.

Business intelligence

Banks require business intelligence solutions to integrate and analyse their customer

data and report on that information to make betterinformed decisions. This will enable

banks to measure and learn from customer behaviour for product development and

marketing purposes - as well as performance management.

Customer relationship management

Customer relationship management (CRM) backed by strong business intelligence is

critical to better serving the customer and supporting growth opportunities. CRM

solutions should be fully integrated with the day-to-day work environment of frontline

staff and make it easy to translate customer insight and centralised marketing

campaigns into successful customer interactions.

Existing systems are viewed as difficult to use with a high learning curve. Ultimately,

systems should use familiar user interfaces and be designed to work the way staff are

used to working.

Unified communications

A significant factor in building lasting customer relationships is the ability to

communicate with customers in the way they prefer and in the way that is most

appropriate to the stage of the sales cycle. This means the whole range of

communication capabilities, including e-mail, telephone, SMS text, instant messaging

and video conferencing, should be integrated and made available to frontline staff.

This will also have a significant impact on real-time collaboration – between advisors

and product specialists or legal expertise within the bank – required to complete a

proposal or customer analysis.

Mobility

Increasingly, we can expect customer contact to take place outside the branch – in

locations such as the workplace or at the customer‟s home. In this context, mobile

technologies will be an essential tool for advisory staff who operate remotely and

need full access to customer and product information.

The whole range of communication capabilities, including e-mail, telephone, SMS

text, instant messaging and video conferencing, should be integrated and made

available to frontline staff.

2.4.4 PEOPLE ENABLEMENT

One of the main customer criticisms of banks is that they operate too much in a

product and channel silo mentality and process.

Changing the role of key people, particularly at the branch level, will play a vital role

in building a new customer advice model. the branch-based relationship manager will

be the key role in providing advice to customers.

Other key roles include making the teller a key point in collecting relevant

information about the customer and referring them to more knowledgeable specialist

staff.

Similarly the positioning of a concierge or „meetergreeter‟ in the branch is likely to

play an increasingly important role in the provision of advice. Again, this involves

collecting and storing relevant customer information and insights, and then using this

to direct and refer the customer to the best advice source or member of staff.

Away from the frontline, the role of customer insight and customer data analysis is

likely to become increasingly important as banks compete to maximise the data they

currently have. The implications are that banks will need to invest more in training

and recruiting the right skills to create better knowledge information workers, and

there will be strong competition for specialised staff.

One of the main challenges will be deciding on the right level of investment the bank

needs to make in order to retrain existing staff to provide high levels of service within

new advisory roles. We are also likely to see an increasing influx of staff being

recruited from retailers where the requisite skills of customer empathy and

communication are likely to outweigh the need for banking knowledge and

experience.

The success of providing a quality customer advisory intelligence model will not

depend on one staffing role or department but rather on the ability of senior bank

management to develop a range of skills at both support and frontline level that can

work together in a more coordinated and integrated manner than has been the case in

the past. One of the main customer criticisms of banks is that they operate too much

in a product and channel silo mentality and process. The „smarter knowledge bank‟

will need to break out of that mentality and offer a more coordinated and integrated

cross channel advice model. Customers will not expect to have to go to a branch to

get advice from their bank. Banking staff will need to be much more channel aware in

referring customers from one channel to another and in utilising specialists where

appropriate. Whilst it is no longer feasible for one member of staff to be fully

knowledgeable and regulatory compliant on all products, considerable scope exists for

a relationship manager/ gatekeeper role to be developed for more profitable

customers. For the majority of mass market customers, banks are likely to offer a

combination of self-help and direct contact advice, offered through call centre and

mobile sales and advisory staff rather than through the physical branch network.

Lastly, there is likely to be continuing debate and regulatory involvement in what

banks choose to call their frontline staff. There is likely to be increasing pressure on

banks from regulators to only use the words „advice‟ in job titles where the bank or

financial services provider can demonstrate that advice rather than just sales are being

offered.

2.4.5 OPERATIONALISATION

The problem with most bank strategies is that you have to execute or operationalise

them A standardised process is required for customer information gathering A data

warehouse needs to be established with all relevant contact information and contact

results. The challenge is to make the most relevant information available in a way that

it can be easily used for analysis and operational tasks (such as producing leads).

Action plans need to be established to improve CRM capabilities – including

investing in tools, applications and training. In establishing a „customer view‟ source

of information, there needs to be a clear plan of action and strategic steps as to how it

will be used. Customer information systems need to be used at all customer touch

points. Recruitment and training of proactive personal bank advisers who need to

know how to approach the right customers. Personal bank advisers are scarce

resources that need to be used efficiently. They need to target specific customer

segments. The challenge is to be available for the most profitable customers. It is

important to establish the necessary customer facing processes and capabilities to

capture better customer information. More simplified user friendly standardised tools

and scripts are required by customer advisers. An important step at the frontline is to

provide a holistic multi-channel view of the customer relationship. Frontline staff

need to be educated about how best to use standardised processes and then

empowered to act directly with the customer. Considerable investment needs to be

made in staff training – convincing sales and advisory staff on the value of a new

approach requires considerable change management effort. Branch and frontline staff

need to be trained and educated on how to transfer customer knowledge in to

individualised advice and data mining analysis techniques, that works closely with the

retail and commercial operational areas of the bank. Recruitment of hands-on

experience in customer intelligence and customer data mining is seen as essential by

Council members One of the main challenges in operationalising a new customer

advisory and intelligence model is change management and the task of transforming a

traditional local bank, with local information, to centralised and industrialised

processes with local touch in delivery. Above all, banks need to clearly define the

provision and processes for each defined customer segment in accessing and utilising

advice.

2.5 KNOWLEDGE BANKING AND SMEs

SME: While there is general agreement that the SME market is significant in size and

importance, there is considerable variation in their definition around the world. A

common definition of SMEs includes registered businesses with less than 250

employees.

Fostering a dynamic small and medium enterprise (SME) sector is seen as a priority

amongst economic development goals, in both developed and emerging economies.

SMEs are a primary driver for job creation and GDP growth. They greatly contribute

to economic diversification and social stability and they play an important role in

private sector development. SME development also represents a major and difficult

challenge. SMEs typically face more severe constraints to growth than large

companies, their lack of critical size resulting in reduced access to markets, skills, and

capital. Lack of access to financing is consistently cited by SMEs as one of the main

barriers to growth. Often considered by commercial banks and financial institutions as

risky and costly to serve, SMEs are largely underserved when it comes to basic

financial services. With such limited access to financing, SME owners struggle to

make the investments they need to increase productivity and competitiveness of their

business, develop new markets, and hire more people.

In such a situation, there are some reasons for the banks to restrain themselves from

investing in SMEs.

The paper will discuss such issues and try to explore the potential in SMEs for banks

to carry out their business with them.

Some of the issues are:

Can small and medium enterprises be banked profitably?

Is the market today an attractive one?

How do banks overcome the challenges and capture the opportunities offered

by the SME segment, particularly in developing countries?

How can banks successfully expand their SME banking operations?

THE STATE OF SME BANKING TODAY

SME banking is an industry in transition. From a market that was considered too

difficult to serve, it has now become a strategic target of banks worldwide. The

“missing middle,” describing the gap in financial services provided to SMEs, is

shrinking. SME banking appears to be growing the fastest in emerging markets (low-

and middle-income countries) where this gap has been the widest. More and more

emerging market banks are developing strategies and creating SME units.

Competition in other markets is one reason cited for commercial banks moving

“downstream” to serve SMEs. Also, governments around the world now recognize the

importance of the SME sector and have worked to support its access to finance,

sometimes by addressing legal and regulatory barriers or building credit

infrastructure. But the key to the growth of SME banking may be that banks are

starting to understand the particular needs and preferences of SMEs, and are

developing tailored approaches to overcome the historical challenges of high credit

risk and cost to serve. One sign that banks are unlocking some of the potential in the

market is that they are reporting higher returns on assets from their SME operations.

For example, leading banks reported ROAs of 3–6 percent for their SME operations

compared with 1–3 percent bank-wide. Also, contrary to common perception, the

SME market is served by a wide spectrum of banks, not just smaller banks with

relationship-based models. Today, despite the significant challenges posed by the

current (2009) global economic crisis, and the uncertainty ahead, many banks seem to

be holding fast to their strong commitment to the SME sector, especially in emerging

markets. While the full impact of the crisis is not yet apparent, banks maintaining

their focus on SMEs often cite a strong belief in the importance of the SME sector to

the national economy as a whole.

WHY SMEs?

The SME sector is important to national economies because it contributes

significantly to employment and GDP, and because its growth is linked with the

formalizing of an economy. The majority of jobs are provided by SMEs. Till now, the

banks have been focussing towards the large enterprises only. But now the market for

banks there is over crowded and nearly saturated. Therefore, the banks should shift

toward the SMEs as they have a great potential as investing in SMEs will contribute

to the development of Indian economy and in a developing economy, SMEs emerge

and grow more. So, the scope in SMEs will be vast to be explored.

At present, the SMEs constitute around 30% of the market which is a good indicator

of the SMEs potential as a market place.

BANK APPROACHES TO SERVE SMEs

To effectively serve SMEs, banks have had to change the way they do business, and

manage risk, at each stage of the banking value chain. This begins with working to

understand the market, and how it differs from both the retail and commercial

segments. Next, in developing products and services, banks have begun to understand

that SME banking means much more than SME lending and are, therefore,

prioritizing non ending products in order to provide total customer value. Banks have

found ways to manage both costs and credit risk as they acquire and screen clients. A

bank‟s current portfolio provides both a low-cost starting point for generating new

business and a source of valuable data that can enable it to understand and predict the

risks associated with SME clients. Developing this capacity to predict risk without

completely reliable financial information, by using tools such as credit scoring, has

enabled banks to more effectively screen potential clients. In serving SME clients,

banks are improving efficiency by using mass-market approaches for smaller

enterprises and using direct delivery channels where appropriate. They also build their

revenue base by prioritizing cross selling to existing clients. Finally, banks are

adapting IT and MIS tools, and building capacity to effectively use these tools for

managing information and knowledge in their service of the SME market, especially

in understanding profitability and risk.

2.6 EXAMPLES

The experience of individual banks such as YES Bank, ICICI Bank, Wells Fargo and

Standard Chartered demonstrate innovative approaches to SME banking. Some of

these innovations include:

1. Knowledge banking

2. Multi-level service segmentation

3. Creative involvement in equity financing of SMEs.

CHAPTER 3

ANALYSIS

Knowledge Banking Approach and its benefits to Yes Bank

Corporate Finance

The Corporate Finance team of YES Bank offers its Corporate, Institutional &

Business Banking clients a combination of advisory services and customized

structured products to meet their specialized requirements. They offer their wide

range of Corporate Finance solutions to the following categories of clients:

1. Local Corporates

2. Multinational Companies

3. Financial Institutions

4. Public Sector Undertakings

YES BANK believes that it has a substantial "knowledge arbitrage" over the market,

helping its clients to obtain superior financial returns in a risk mitigated manner.

Each member of the Corporate Finance team brings with them a wealth of transaction

experience across transaction varieties and sectors and enjoys strong, established

relationships with both corporates and financial institutions.

Innovative & Comprehensive Solutions

The Financial Markets Group at Yes Bank offers a competitive and comprehensive

lineup of financial market products and services to our customers. The group provides

optimal client solutions in the form of products and services related to foreign

exchange, derivatives, local currency debt, money markets and commodity advisory.

They provide risk hedging solutions in several currencies to meet the trade, capital

and risk-related requirements of our Corporate, Institutional and Business Banking

clients.

The Financial Markets business at YES BANK can be broadly divided into three

divisions:

1. Client Sales and Market Making

2. Propriety Trading

3. Balance Sheet Management Activities

Yes Bank‟s Financial Markets team undertakes product sales for offerings such as

Foreign Exchange Spot & Forward transactions and Derivatives. Their key focus is on

the origination of client-related business and its efficient execution, as well as on

establishing relationships with all our counterpart banks and institutions. By

introducing innovations and fresh ideas, they not only share the very latest

information and best practices, but also take local knowledge and perspectives and

apply them in the context of broader solutions.

Top Quality Human Capital

YES BANK's Financial Markets team comprises of 37 experienced, quality

professionals drawn from business or product leadership roles with various foreign

and Indian banks. The Financial Markets team is committed to the core values of

client focus and innovation that characterize all the businesses at YES BANK. The

Yes Bank‟s commitment to its clients is exemplified by the creative, sophisticated and

tailor-made solutions for each client's specific requirements. As they expand their

branch network across the country, their experts will work towards creating value for

their corporate and institutional clients. At Yes Bank, they provide their customers

with knowledge-driven, industry-specific solutions that are customized to best suit

their business needs. As a result, they have identified certain sunrise sectors with high

growth potential. Their dedicated teams of Bankers for each of these segments are

also industry experts who offer in-depth and invaluable insights into your business.

Some of our key focus sectors include Food & Agri-business, Life Sciences &

Biotechnology, Telecommunications and Information Technology. Yes Bank looks to

develop a long-term advisory and banking relationship to provide the entire gamut of

services to these clients. Therefore, they offer their clients customised products at

various points in their business life cycles.

REFERENCES

References

Internet Links

1. http://siteresources.worldbank.org/WBI/Resources/KnowledgeBankOct2004.p

df

2. http://www.yesbank.in/knowledgebanking.htm

3. http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/SMEBankingGuideboo

k/$FILE/SMEBankingGuide2009.pdf

4. http://www.flipkart.com/book/knowledge-based-systems-banking-

sector/8177080652

5. http://www.financialexpress.com/news/banking-on-knowledge/157161/

6. http://siteresources.worldbank.org/WBI/Resources/KnowledgeBankOct2004.p

df

7. http://siteresources.worldbank.org/WBI/Resources/EvolutionoftheKnowledge

Bank.pdf

8. http://web.worldbank.org/WBSITE/EXTERNAL/WBI/0,,contentMDK:20212

624~menuPK:575902~pagePK:209023~piPK:207535~theSitePK:213799,00.h

tml

9. http://www.eldis.org/go/topics/resource-guides/finance-policy/key-

issues/knowledge-bank

10. http://www.cgdev.org/doc/books/rescuing/Kapur_Knowledge.pdf

Books/Reports

1. Don Cohen and Bruno Laporte, The Evolution of the Knowledge Bank (KM

magazine, 2004).

2. The SME Banking Knowledge Guide, (International Finance Corporation,

World Bank Group, 2009).

3. Davenport, T.H. & Prusak, L., Working Knowledge: How Organizations

Manage What They Know (Harvard Business School Press, 2000).

4. Dixon, N., Common Knowledge: How Companies Thrive by Sharing What

They Know (Harvard Business School Press, 2000).

APPENDIX

APPENDIX

CASE STUDY 1: HSBC MyMoney

HSBC has developed a unique approach to gaining customer insight. Its „Insight to

Grow‟ (i2G) process allows the bank to gain a detailed understanding of the events

that drive customers‟ requirements and their attitudes towards financial services –

allowing the bank to tailor its propositions to specific customer segments. MyMoney

is one example of how these techniques have been applied. The result is a proposition

that revolutionises banking for the 7-17 age group and increases the number of

customers retained when they move to new segments at the age of 18. HSBC views

this segment as a nursery for customers who will deliver value to the bank in the

future, and has discovered that:

• 75 per cent of adults remain with their original financial services provider

• It is more cost effective to acquire in the youth segment and retain them into

adulthood than to try to acquire adult switchers

• Customers recruited between the ages of 7–17 have a higher average value than

those customers who join at 18–24.

Alongside focus groups, questionnaires and commissioned research, HSBC has

undertaken some more unusual activities to gain insight into this segment, including

members of the MyMoney team spending a day „doing what kids do‟. As a result

HSBC identified they had to satisfy the needs of two groups:

• Parents who are concerned about the long term financial prospects for their children

and the need to educate them on financial matters

• 15–17-year-olds who think in a different way to their younger counterparts but show

limited understanding of banking and its importance to their everyday lives.

The core of the MyMoney proposition is a current account linked with a savings

account. As these customers move through their teen years, more features are

included to reflect their growing independence. Parents can see that MyMoney gives

the child the ability to save money and separate it from their spending money – whilst

15–17 year-olds see a bank that understands their needs, is approachable and gives

them a range of options to access and manage their cash. In one year MyMoney

delivered ten per cent acquisition growth and, by encouraging saving through online

banking, HSBC increased savings balances by 40 per cent in this segment. A key

element of MyMoney is internal communications to convey the message that HSBC

has to overcome this segment‟s perception of banks. HSBC staff now understand the

bank has a youth proposition that allows these customers to develop valuable long-

term relationships. MyMoney targets this segment through in-branch

communications.

CASE STUDY 2:

Caja Madrid (Asesor Personal)

Through its Personal Banking Service, Caja Madrid has developed a new financial

advisory model to enable its advisory staff to communicate, recommend and follow

up on the most suitable investments to meet individual customer needs. To achieve

this, Caja Madrid has implemented advanced financial technology to obtain the

individual investor profile of its customers and the specific features of each proposed

investment. This new solution provides financial advisers with recommendations

based on customer insight analysis, includes investment parameters (risk, return etc.),

and provides flexibility for the financial adviser at the commercial desk to personalise

investment proposals for each individual customer. Caja Madrid started developing

this advanced financial advisory solution – Asesor Personal – in 2004, implemented it

within its branch network a year later, and is now focusing on extending the advisory

capabilities and service quality the solution offers. Caja Madrid is now generating

150,000 proposals annually, and in April 2008 the bank had 225,000 portfolios under

management valued at 40 billion.

Caja Madrid emphasises two key factors in the success of this project:

1. Information management (integration, availability, updates) – To provide a quality

financial advisory service it was critical to aggregate customer data including current

investments, fiscal conditions, net worth etc. This information needed to flow between

the branch and the central analysis and asset management areas of the bank – and be

updated at any point.

2. Branch network support (Asesores en Recursos) – Even with the channels and tools

to analyse, propose and follow up on investment opportunities, the bank faced the

issue of adoption within the branch network. This required a strong financial

knowledge base, and intensive training on both the financial instruments advisers

would be proposing as well as the tool itself. In addition to this, Caja Madrid is also

supporting its advisors across the branch network with product specialists via remote

channels.

CASE STUDY 3:

First Mover Advantage: Bank Muscat Targets Oman’s

Unbanked SME Market

In 2006, Bank Muscat had successfully captured a 40–45 percent commercial banking

market share in Oman, but noticed that no one was targeting the SME sector. Its own

small portfolio of SME loans was performing poorly. So, it asked itself, “Do we want

to drop this market or do we want to learn how to do this well and make money on

it?” Recognizing the opportunity to establish itself as the first bank to serve SMEs in

the country, Bank Muscat chose the latter. Bank Muscat knew it needed to build

knowledge of the sector, so it gathered market research, including a World Bank

study identifying a potential client base of 15–20,000 SMEs and competition limited

to equipment and leasing companies. It sought investment and advisory assistance

from IFC, including help conducting a market survey and formulating strategy. Bank

Muscat also sent a team to observe the operations of top SME banks in Europe. Based

on these inputs, it restructured its operations, segmenting its lending into Program

Lending, which offers highly structured products to smaller SMEs, and SME Finance,

which provides more customized service to larger SMEs. The bank is now in the

process of upgrading its Client Relationship Management (CRM) and MIS

capabilities so that it can use current portfolio information to increase sales and to

develop its own credit scoring models. Over two years, Bank Muscat has mutiplied

SME loans, deposits, and customers.

CASE STUDY 4:

Serving the female-headed SME segment: Access Bank Plc

Nigeria

A key niche market in SME banking that is often neglected is that of SMEs headed by

women entrepreneurs. Women worldwide are starting and growing businesses at a

remarkable rate; female-headed SMEs represent an estimated minimum of 38 percent

of all registered small and medium enterprises. Though they are active in SMEs

around the globe, especially in emerging markets, women‟s contributions are often

overlooked due to limited market data about this segment. In 2005 Access Bank Plc, a

leading African bank headquartered in Nigeria, realized that to stay ahead it needed to

differentiate itself from its competition. With the help of IFC, Access Bank saw an

opportunity in the women‟s market to expand its SME and retail strategy, positioning

itself uniquely from other banks. IFC made a $15 million loan to the bank in 2006 to

enable it to extend credit lines to women entrepreneurs in the SME sector. In addition,

IFC provided advisory services for turning Access Bank into the “bank of choice for

women” in Nigeria. IFC experts worked with bank staff to design and implement a

strategy to attract and segment the women entrepreneurs in the SME market, and to

design products that address challenges commonly faced by women borrowers. As of

June 2009, Access Bank had opened over 1,300 new accounts and disbursed over $33

million in loans to women entrepreneurs, with an average loan size of $98,000. Over

650 women have been trained in business and management skills. The bank has

enjoyed an enhanced reputation in the market and has won several awards recognizing

its innovation in the women‟s market, including the African Banker Award in 2007

and the Global Banking Alliance Most Innovative Bank Award in 2008. Through this

program, the bank is capturing a key market niche in Nigeria‟s dynamic and growing

SME sector. The success of the program has led to its replication in other countries as

the bank rolls out subsidiaries in Africa.