Performance Evaluation of Banking Institutions

Question: Discuss about thePerformance Evaluation of Banking Institutions. Answer: Introduction The financial authority decides for centralisation of the commercial banks or retail banking to meet certain goals. There essential features of the centralised banks are standardised processes, improvement in productivity, risk mitigation, improvement in service quality, integrated supply chain management, cost control and service outsourcing. These are the positive sides of centralisation of the banking institutions such as banks A. A group of authority at headquarter decides the interest rate, saving rates for all the branches in order to operate an integrated system. The salary of the employee is determined based on the productivity performance. Their incentives are based on number of selling differentiated products in order to gain competitive advantage in the market. The salary of the employees has been linked with the strategic objectives of Bank A. The business strategy of Bank A is to retain the market share in the face of strong competition. This bank expects a tough competi tion from Google, which already has a market power and recognition. However, in the view of Thompson and James (1967), this kind of pressure creates burden on the employees, which may de-motivate them to work efficiently. They even do not get sufficient time for the lunch break. This kind of organisation is detrimental for the growth of the organisation. As stated by Dougherty and Deborah (1992), aggressive market strategy may be profitable in short run, however, not sustainable in long run. Aggressive business strategy increases work pressure and decreases employee satisfaction. As a consequence, employee turnover may increase in Bank A affecting their profitability. Moreover, Okhuysen et al. (2009) commented that de-motivated employees fail to communicate with the customers effectively driven by the workplace frustration. Hence, miscommunication with customers may affect the profitability as the customers may shift to other financial institution, which is able to provide better services. Therefore possible recommendation for bank A is discussed here. Higher authority of Bank A requires developing a new strategy to gain competitive advantages in order to compete with a company like Google. Corporate culture practiced in this institution such as hard working is good however; this process can be implemented in other ways by improvement workplace environment. The main advantage of the Google is that this company provides employee the time and facilities for enjoying work place despite having tremendous work pressure. Banks A needs to adopt this type of organisational culture for their institutions. The central unit employed by Bank A can suggest to develop multiple and differentiated products along with savings accounts and interest on loan. Product bundling may be a strategy to get competitive advantages (Srikanth, Kannan and Puranam 2011). As suggested by Simon and Herbert (1997), technological improvement is important for centralised banks in order to integrate all the information regarding loan files. Deposits of money in different types of accounts are the primary source of investment for banking institutions. Higher interest rate encourages households to deposit more money in the bank. These resources are used by the banks to give loan to the borrowers. Return from loan is the main source of revenue to the bank (Milgrom, Paul and Roberts 1992). Therefore, the central unit can suggest bank A to raise interest on savings and reduce interest rate on loan in order to provide benefits to the customers. This strategy can increase the scope of competitive advantage in the market in order to mitigate possible threats from potential competitors. Financial product innovation is a crucial strategy for the business development. The central unit may suggest the authorities of Bank A to reduce work load from the employees. As opined by Dyer et al. (1998), incentive based performance is good as this process motivates the employees for better service. However, this practice need not be forceful. Therefore, the central unit can suggest possible ways for work pressure reduction. Bank can recruit more specialised employees as per each banking product category. The authority needs to emphasise on the high priority tasks first. Work schedule needs to be prepared according to the priority of the tasks. Employees may be given training regarding time management. Development of internal and external communication is important aspect of gaining competitive advantage. Direct conduct with customers helps to grow customer loyalty. These strategies are likely to be helpful for Bank A to mitigate possible threats and to increase its profitability both in short run and long run. Customer loyalty is very helpful for overcome th e threats of new entry in the market. Bank B is resilient to the changing environment of the market. Their business is customer oriented. Bank B gives value to the prospective stakeholders such as employees and customers. They also use performance based remuneration for their employees. Cultural environment of Bank B is very supportive for innovation in product and services as there is good collaboration among the co-workers. Moreover, flow of information within the organisation is effective for proper communication with the employees. In the view of Gavetti et al. (2012), employees are important stakeholders for the organisation and hence, they can contribute important ideas for the development of the business. Employee oriented strategy is business advantage for Bank B. Involvement of the employees in the decision making process are feasible for product innovation for Bank B. Despite having effective business strategy there are further scope for Bank B to develop their strategy to retain the market share. Corporate strategy of Bank B is stronger; however, it needs to concentrate on the business level strategy to increase their profitability. Google is a strong potential competitor in the financial market. However, the bank may take a market leadership position through cost control and revenue maximisation strategy. As opined by Milgrom, Paul and Roberts (1992), cash and asset management strategy are important criteria for cost control. Bank B can take market leadership through partnership with other banking institutions. Merger and acquisition is often helpful while intending to increase market share. Formation of cartel is effective to restrict possible entry of new firm. As cited by Srikanth, Kannan and Puranam (2011), development of information technology in banking sector improves the maintenance of electronic files regarding deposits, loans and other assets. E-banking facilities are gaining facilities in present times. Therefore, application of ICT in Bank B may b effective for attracting consumers. Value added products such as providing another service, facilities or product with a specific deposit account can be helpful for increasing revenues. Interest rate on saving account in compliance with the profit margin can attract more customers as they get higher return. Development of national payment system such as real time gross settlement, automated clearance house, automated teller machine facilities, point of selling gives greater facilities to the customer by reducing the problems of physical transaction. Bank B can be suggested to implement these types of product innovation. Technological innovation is effective strategy for long run sustaina bility. Asset and liability management is a crucial part for banking business. Banking institutions like Bank B often has to face marketing and business risk due to mismatch between the account receivables and account payables. Bank B needs to set a target to meet Basel norms in order to reduce risks. Milgrom, Paul and Roberts (1992) mentioned that the scope of banking business has enhanced after globalisation. Hence, the effect of market and exchange risk is greater no compared to before. Therefore, Bank B needs to hedge protect their business in the face of growing competition coming from both domestic and international markets. Risk mitigation strategy would be beneficial for sustainability of the business in long run. Product innovation and product differentiation are effective in short run. However, these strategise cannot give sustainability in the long run. In order to bring sustainability in the financial market, Bank B needs to ensure the collection of payments from borrowers on or before time. Development of customer is helpful in this context. The scenario presented above in the two case-studies strongly indicates the problems in the banking sector when there is threats of new entry in the market. The bank has been unable to perform as it was supposed to do. Under this circumstances two major banks which are now struggling to meet up their targets, earn a lump-sum profit and survive in the market is now struggling and seeking help from the McKinsey. The first thing that needs to be highlighted is the strategies that can be used to merge the institutions and the recommendations that can help in the post merging scenario. The term merging is defined as the process where the two companies are integrated into one single company so that they can implement their best strategies in making their business successful (Aktas, De Bodt and Roll 2013). The two banks namely Bank A and Bank B can be merged only after following the Companies Act and by abiding the corporate laws of the country. The component which helps these two banks to get merged up and be organized is as follows: Resource, Health and Culture. Resource: The chief resources of any banking institution are the employees who help in making the organization successful. Other than the employees the number of customers that the bank has also adds up to their resources. Health: The net assets of the banks and the liabilities imposed on them decide upon the health of the bank. If any bank has huge amount of asset with minimum liabilities is the target that every bank wishes to achieve. Culture: The term culture implies the work culture that exists within any institutions. In this scenario both the banks show a complete unique work culture (Froehlich, Segers and Van den Bossche 2014). The steps that the banks need in order to merge up are as follows: Identify the problems associated: Lack of innovation is the main problem along with delay in operation for our case. Other companies like Google have been trying to enter the financial market and provide better innovative service to the consumers. Under this circumstance, through the system of merger both the banks should try to deviate from their existing service and focus on the demand of the consumers and upgrade themselves accordingly. Appropriate price determination: The cost that both the banks must incur in order to merge up should be analyzed. At the same time there is a need to construct the expected benefit that may happen due to this merger. If the benefits are seen to be worthy keeping in consideration all the aspects, then only it is recommended that the banks can merge. Post-merger integration advice: It is obvious that two organizations with completely different setup is expected to face struggle and conflicts in their operations. Hence, it is advisable that the management team of these banks must integrate amongst themselves and keep a check on the workings of the employees and their satisfaction level and organize some session to advise them on their drawbacks while motivating them for their good works as well (Carletti et al. 2016). The difference between the two banks needs special mention while thinking of merging them. Bank A, being fully centralized follows the top-down process while Bank B follows bottom up process. Bank A focuses more on corporate culture and provides good incentives to its employees to motivate them. But the fundamental flaw of this institution is that it treats its employees as a machine. There is lack of communication between the employees within the branch and also with the employees of different branches. This hampers their performance to a great deal. On other hand the autonomous strategy followed by bank B prioritizes the customers and gives freedom to its employees in certain aspects of their working. This bottom up process helps in retaining the customers. Hence, it is advisable that the banks after merger should prioritize the customers and provide some liberty to the employees to work according to their convenience. It can ensure customer retention. Also regulation should be from the centre itself to maintain a equitable regulation but the organization needs to ensure that the Central control of the bank should not be the result for delay in decisions taken and thereby hampering the customer. References Aktas, N., De Bodt, E. and Roll, R., 2013. 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