Development Credit Bank (DCB) is a modern emerging new generation private sector bank.

It
was classified as a “New Generation Private Sector Bank” by RBI, as DCB is the only co-
operative bank in India to have been converted into a private sector commercial bank. The bank
has always had the Vision “To be the most innovative and responsive neighborhood community
bank in India serving entrepreneurs, individuals and businesses”. This Vision of the bank helped
them create a Unique and a valuable organizational culture and in turn a Sustainable Competitive
Advantage. It is the traditional customers that are the utmost important assets to the bank, clearly
indicating that the bank has “Costly-to-imitate capabilities”. It is also evident that the influence
of traditional customers is due to the bank’s promoter, Aga Khan Fund for Economic
Development (AKFED). This bank was always in favor for keeping their provisions high which
in-turn helped them in the 2008 economic crisis and restricted their losses to 88.1 crores. But that
economic crisis also meant that DCB had to change their way of approach.

Strengths:

a. DCB bank is promoted by the Aga Khan Fund for Economic Development. It is an
international development enterprise, and is dedicated to promoting entrepreneurship and
building economically sound companies.

b. DCB is continuously investing in modern systems and infrastructure to support growth.

Systems such as Finnacle, Finone, CMS, Internet and mobile were bought for carrying
out operations.

c. DCB is the only co-operative bank in India to have been converted into a private sector
commercial bank.

d. Has exceptionally maintained the strong provision coverage trend.

e. DCB’s business trend clearly depicts that it’s ‘Mortgages’ under their diversified
portfolio has comfortably managed to hit a benchmark every financial year since 2009.

Weakness:

a. Only 26% of complete DCB’s portfolio comprises of corporate banking whereas its
competitors manage 68% of their profile in corporate banking. It is due to the past
experiences that they are bounded to provide unsecured loans.
Opportunities:

a. DCB bank is expanding presence in Tier-2 to Tier-6 villages; it aims to grow the
customer base with a range of banking products and services to farmers and also reach
out to micro-SME and SME segments.

b. It is also trying to strengthen its Agri and Inclusive Banking (AIB) portfolio by bringing
new banking products such as tractor loan, loan against gold jewellery, warehouse
construction loan, financing against warehouse receipts, crop and land development loan
to famers and working capital loan for agribusiness and micro and small & medium
enterprises”

Threats:

a. High vigilance and constant monitoring and interference by the government can lead to
situations like one; after the recent capital raising, AKFED plus affiliates hold 16.41% of
Bank’s equity. As per the road map submitted by Reserve Bank of India (RBI) earlier,
AKFED plus affiliates stake is to be reduced to 10%.

b. Recession in Europe and US.

 For the past few years, the bank has adopted the strategy of limiting unsecured
exposures and growing secured lending. As sudden changes in the environment in
mid – 2008 resulted in increased Non-performing assets (NPA) and further
resulted in adopting stringent provisioning norms in unsecured loans. It was then
that they had majorly shifted their portfolio to:
1. Mortgages
2. SME / MSME
3. Agri and Inclusive Banking (AIB)
4. Corporate banking

Still the bank has calibrated and cautious participation in Corporate Banking and as far as
possible tries to avoid large ticket size, unsecured lending and infrastructure sector.
Goals and Objectives:

A. Rely mainly on Retail Deposits (Term, CASA) for funding.

B. Focus on Branch expansion in Tier-2 to Tier-6.

C. Grow Retail Mortgages, MSME, SME, Commercial Vehicle, Tractors, Gold loans, mid-
Corporate and Agri loans; limiting the unsecured lending and lumpy exposures.

D. Relentless focus on liquidity, Costs, Operational risks, People and Customer service.

E. They intend to keep an approximate mix of Retail / Mortgages 40%; MSME / SME 15 to
20%; Agri and Inclusive Banking (AIB) 15 to 20% and Corporate 20 to 25%.

F. Stringent mechanism for managing credit and Operational risks.

G. Increase fee income by cross selling insurance, mutual funds, trade and cash
management.

H. Continuously strengthen credit processes, portfolio management and recoveries.

Analysis / Evaluation of effectiveness of Business level strategy:

The type of business level strategy DCB tends to perform is of satisfying customers unique
needs; they carry out integrated set of actions to produce services that customers perceive as
being different in ways that are important to them, also known as Differentiation Strategy. This
depicts that their competitive scope is a broad target and their competitive advantage lies in
uniqueness.

1. Analysis: The financial level strategy of maintaining the portfolio of ‘Mortgages’ has
been up to the mark. It is one of the major portfolios for DCB and also it managed to hit
benchmarks in consecutive years since 2009.

 Evaluation of effectiveness: The portfolio has grown quite well in the past 3 to 4
years taking into considerations the nature of any portfolio growth in retail some
uptick in NPA’s could be expected, but none of greater concern. Usually you do
 not lose money in Mortgages because customer respects their self-occupied
property and settle with us.

2. Analysis: Inspite there were about 12 branch openings yet the cost income ratio did fair to
meet the expected performance the target it was supposed to meet was 55% but in-turn
managed to come down to 62% from 74% in 2012.

 Evaluation of effectiveness It was reported that the main investment that has been
done by the bank was expanding branches in a very systematic and calculated
manner. The firm accepted that it didn’t have any huge investments for any
infrastructure or the usual capacity related investments. The locations of the new
opening were tier-2 and tier-3 villages and it was due to the locations that
reflected quite nominal rentals. Also there were some relocations made that
helped the firm further reduce the cost to income ratio. The lower the cost-to-
income ratio, the more efficient the firm is running. The cost-to-income ratio
shows the efficiency of a firm in minimizing costs while increasing profits.

3. Analysis: DCB faced a challenge in regard to the size of the balance sheet. They expected
a balance sheet twice of that in 2011.

 Evaluation of effectiveness They didn’t exactly end up meeting the desired

performance but it was due to their cautious and calibrated participation in the
corporate banking sector and tried to avoid large ticket loans, unsecured lending
and infrastructure sector could put pressure on bank’s earnings due to large ticket
loan slippage to NPA (Non-performing assets).

4. Analysis: Maintaining CASA ratio had been given the utmost preference since 2009 as
this is the ideal way for the bank to get money at low cost.

 Evaluation of effectiveness It was due to weak market conditions that the growth
of Current Account (CA) had been hindered, while Savings Account (SA) had
been growing consistently. The bank had a strong focus on CASA and further to
promote it; it took steps like free Inward and outward RTGS & free Inward and
outward NEFT. Since DCB has also put down its stakes for expansion of new
branches it may also help to contribute to the CASA ratio.

5. Analysis : Expansion in Tier-2 to Tier-6 villages

 Evaluation of effectiveness DCB was successful in meeting their short term

expansion goal; they managed to open approximately 35 branches in 2 years in
 the rural areas. As a matter of fact the issue of licensing is eliminated when
opening of branches in rural areas is taken into consideration, also with opening
of every 3 branches in rural areas license for 1 branch in urban area is made
available according to the laws. The firm has to further keep a constant check on
their cost to income ratio as making the branch work and produce results is quite
difficult then just opening a branch.

6. Analysis: Observance of provision Coverage Ratio which have been showing some
decline.

 Evaluation of effectiveness: Study shows that the last quarter of the previous year
had 100% provided accounts and they took a write-off, this quarter provision
coverage ratio turns out to be 79%. So this automatically puts some pressure on
the books. Also it is evident that the provisions are not just made based on what is
the statutorily requirement but even above that whatever provision is required,
based on past experience of collections and recoveries. Also according to the
latest guidelines of the RBI since the state is not undergoing any economic crises
they have limited the provision coverage ratio and it must be shown in the profit
and loss account. This decision was made in order to declare the excessive cash as
profits and must be provided to the shareholders as dividend.

Recommendations:

According to our opinion the bank has taken correct measures so as to maintain adequate
amount of balance between its portfolios. As of now the 4 portfolios that contribute to the
Major chunk of earnings for the bank are Mortgages, SME/MSME, AIB and Corporate
banking. But on the other hand if the bank is also considering portfolio diversification
then according to my recommendation they should also start providing Educational loans
and gold loans as their portfolio. Since the educational loans tend to have the least
probability of getting converted into Non-performing assets in ideal conditions (NPA).

Secondly the complete study provides the knowledge that as of now DCB is more in need
of product depth than that of product innovation. The recent expansion in Tier-2 to Tier-6
must be further implemented rigorously but with the continuous expansion the cost to
income ratio must be kept under constant scrutiny. With the expansion of new branches
they must restrict the Operating cost of these branches and grab the opportunity of the
nominal rentals due to their locations.
 Improving the customer experience was the foundation of their strategies.
Branch reconfiguration, mobile banking applications, back office operations are some of
the growth options for future implementation.
Developing a proactive complain management process that goes beyond regulatory
requirements can drive new customer experience projects”
Need to improve the marketing of the mobile channel to customers as majority of people
carry smartphone for their daily use, so instead of going to bank branches people prefer
mobile apps. But it including enhanced training of employees and one-on-one
demonstrations to customers. “The key is to better understand the needs of customers and
provide personal demonstrations on how mobile banking can meet these needs”.
Expert fund management, professional management, continuous monitoring of portfolio
are some of the key factors that needs to be taken care of as by Deutsche Bank.

ENVIRONMENTAL ANALYSIS
Business environment includes set of conditions or situation that affects business activities or
decision making. These conditions are broadly classified into internal environment and external
environment.

THE EXTERNAL ENVIRONMENT ANALYSIS

External environment include factors which are outside the control of the business organization
but it provide opportunities or pose threats. External environment is further classified into two
categories micro environment and macro environment.

MICRO ENVIRONMENT

WHAT PORTER HAS TO SAY ABOUT BANKING INDUSTRY

Threat of New Entrants:

Threat of new entrants is low due to stringent norms, RBI Regulations, High Initial Investment &
entry barriers. Licensing Requirements are very tough and it make it difficult to obtain licenses
easily. Also, the new entrants will face difficulty as product differentiation is very difficult.
Another issue they face is about the trust development with the people which is difficult and
takes time. Skills manpower and Protected intellectual Property are also the factor that affect the
threat of new entry barriers.
Bargaining Power of Suppliers:

Capital is the primary resource on any bank and there are four major suppliers (various other
suppliers [like fees] contribute to a lesser degree) of capital in the industry.
1. Customer deposits. 2. mortgages and loans. 3. mortgage-baked securities. 4. loans from other
financial institutions.
By utilizing these four major suppliers, the bank can be sure that they have the necessary
resources required to service their customers' borrowing needs while maintaining enough capital
to meet withdrawal expectations.
The power of the suppliers is largely based on the market, their power is often considered to
fluctuate between medium to high.

Bargaining Power of Buyers:

There are four things that come into play when we say bargaining power of the buyers is high. 1)
The individual customer 2) High switching costs 3) The Customer Loyalty 4) The technology.
Factors that affect are Long term Finance, Margins & volumes, Multiple options are available,
Bank competitors are also quite large in number & Retail landing. Providing homogenous kinds
of services so there is high chance that customers switch their banks and therefore overall
bargaining power of the buyer is High.

THREAT OF SUBSTITUTES:

Some of the banking industry's largest threats of substitution are not from rival banks but from
non-financial competitors, investors, NBFCs,small co-operative banks, Government securities, t-
bills and borrowing avenues. The industry does not suffer any real threat of substitutes as far as
deposits or withdrawals, however insurances, mutual funds, and fixed income securities are some
of the many banking services that are also offered by non-banking companies.
There is also the threat of payment method substitutes and loans are relatively high for the
industry. Factors affecting threat of substitutes are Close customer relationships, Conservative
customers, Risk taking customer attitude and Switching cost. Therefore overall Threat of
substitute is medium

Competitive Rivalry:

The banking industry is considered highly competitive. The financial services industry has been
around for hundreds of years, and just about everyone who needs banking services already has
them. Because of this, banks must attempt to lure clients away from competitor banks. They do
this by offering lower financing, higher rates, investment services, and greater conveniences than
their rivals. The banking competition is often a race to determine which bank can offer both the
best and fastest services, but has caused banks to experience a lower ROA (Return on
Assets). Major banks tend to prefer to acquire or merge with other banks than to spend money
marketing and advertising. High fixed costs and high exit barriers make it more competitive.

INDIAN BANKING INDUSTRY: NOT ATTRACTIVE,

UNLESS DIFFERENTIATED

MACRO ENVIRONMENT
PESTEL ANALYSIS
POLITICAL
Government and RBI policies affect the banking sector. Indian banking sector is least affected as
compared to other countries due to robust policy framework of RBI. Government affects the
performance of banking sector most by legislature and framing policy government through its
budget affects the banking activities securitization act has given more power to banking sector
against defaulting borrowers. Sometimes looking into the political advantage of a particular
party, the Government declares some measures to their benefits like waiver of short-term
agricultural loans, to attract the farmer’s votes. By doing so, the profits of the bank get affected.
Stricter prudential regulations with respect to capital and liquidity, gives India an advantage in
terms of credibility over other countries.

ECONOMIC
Every year RBI declares its 6 monthly policies and accordingly the various measures and rates
are implemented which has an impact on the banking sector. The Economic measures affect the
banking sector to boost the economy by giving certain concessions or facilities. If in the savings
are encouraged, then more deposits will be attracted towards the bank and in turn they can lend
more money to the agricultural sector and industrial sector, therefore booming the economy. If
the FDI limits are relaxed, then more FDI are brought in India through banking channels. Also,
every year RBI declares its 6 monthly policies and accordingly the various measures and rates
are implemented which has an impact on the banking sector. Indian economy has registered
robust growth in past years and banking sector is directly related to the growth of the economy.
Government of India is trying to push the economy by framing favorable FDI policies, NRI
Investment plans which directly affect the GDP. These plans directly affect the banking industry
as money comes through banks and banks earn interest on that.

SOCIO-CULTURAL
It includes cultural aspects and health consciousness, population growth rate, age distribution,
career attitudes and emphasis on safety. Increase in population is one of the important factor,
which affect the private sector banks. Banks would open their branches after looking into the
population demographics of the area. Newer banks are coming to serve the growing population.
Banks need to ensure uniform spatial distribution.

TECHNOLOGICAL

It plays important role in banks internal control mechanism as well as services provided. The
developments in terms of telecommunication and computer have encouraged to change the
concept of branch and use ATM and internet banking to provide anytime, anywhere facility.
Automatic Voice Recorder answers simple queries, currency accounting machines makes job
easier and self service counters are encouraged. Electronic purse facilities are provided with
credit and debit card facilities encouraging cashless society. Another major tool used are the
SMS and Internet.

ENVIRONMENTAL

Banking Industry is directly related to the growth of the economy. Increase in per capita income
of the company will increase, lending & savings will increase the business of the bank. Increase
in investment of Industry and Infrastructure sector will lead to increase in borrowings by various
companies to boost the Banking Industry.

LEGAL

Various acts like Banking Regulation act, etc affect the banking industry. The Reserve Bank of
India also intervenes to smooth sharp the movements and prevent a spiral in its value but will
balance this with the need to retain reserves in the event of prolonged turbulence.