Report: Productivity Measurement and Management for the Banking Sector Workshop, November 25-28, 2014, Mumbai, India

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The banking sector plays a pivotal role in the economic growth of a country. The importance of this sector’s contribution is especially significant in member-countries of the Asian Productivity Organization (APO). A well-functioning banking sector facilitates the efficient intermediation of financial resources, that is, the flow of financial capital from the owners of such capital to those who would like to borrow it for use in economically productive endeavors. The more efficient a financial system is in resource generation and in its allocation, the greater its contribution to economic growth.

An efficient system of financial intermediation also contributes to mitigating financial risk. For example, enhanced efficiency in banking can result in greater and more appropriate innovations and improved profitability as well as greater safety and soundness when the improvement in productivity is channeled toward strengthening capital buffers that absorb risk. Moreover, efficiency or productivity measures could act as leading indicators for evolving strengths or weaknesses of the banking system and enable pre-emptive steps by regulators when necessary. Therefore, investigation and measurement of efficiency and productivity in the banking sector have always been areas of interest for APO and its member-countries. The development of an APO assessment of efficiency and productivity in banking is thus found to be a useful contribution to the economic performance of its respective member-countries.

The objectives of the workshop were:

a. Enable participants to acquire the knowledge to measure and analyze productivity in the banking sector;

b. Understand the linkages between productivity and performance measurement indicators in banking;

c. Review the strategic use of performance measures and how to establish indicators, specific targets, and goals for improving overall performance in the banking sector; and

d. Share best practices of productivity improvement of the banking sectors in the respective member-countries.

The workshop consisted mainly of presentations by experts, presentations of country case studies by participants, and site visits. The topics covered were:

a. Identification and classification of data requirements for relevant productivity statistics and measures in banking;

b. Productivity, competitiveness, profitability, key indicators (e.g., return on assets, return on investments, return on capital, the CAMELS rating under the Basel accords, etc.)

c. Identification of the strengths and weaknesses of the banking sector;
d. Measures to enhance productivity, efficiency, and competitiveness in the banking sector; and

e. Linkages between productivity measurement and performance measurement.

OBJECTIVES FOR PARTICIPATION

In light of my previous experiences and accomplishments in the banking and financial services sector, I hope to take these work experiences further by involving myself in any endeavor that will help in boosting productivity in the banking and financial services sector. I want to look at how work processes can be reduced while maintaining the same if not more improved level of verification and audit that is vital in the banking and financial services sector. As the National Productivity Organization for the Philippines, we at DAP are looking at creating a module for banking and financial sector productivity, initially for the government-owned banks such as the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (Landbank). Another key government bank is the Philippine Veterans Bank (PVB). Other non-bank financial institutions such as the Government Service Insurance System (GSIS) and the Social Security System (SSS), both pension programs for the public and private sector, respectively and run by the government, can also be tapped as potential clients.

We are aware that there are many training and other human resource development programs currently being run for the banks. These are mostly being run, i.e., developed and administered, by such long-standing and respected institutions as the Bankers’ Association of the Philippines (BAP), along with the Bankers Institute of the Philippines (BAIPHIL). The programs they run are geared mostly toward training the Throughout the seven decades of its existence, the Institute has lived up to its mission of providing support to banks towards productivity enhancement through research, information exchange and education. As DAP has been able to successfully partner with other institutions since its inception in 1973, it has the capability and institutional memory, knowledge, and experience to develop, plan, and implement programs or training modules with these organizations that will highlight the need for bank productivity in line with national productivity targets that the Academy hopes to revive and reinvigorate in 2015.

Over time, we hope that the programs and modules we will run shall be recognized as well in the private banking and financial sector, and draw interest in this program. I strongly believe that a productive and efficient financial intermediary sector will facilitate the movement of capital to sectors that need it, enabling them to pursue vital economic activities that will redound to the overall growth of the entire economy, and therefore by extension the uplifting of every citizen.

PARTICIPANTS

The program was attended by 14 International Participants and six (6) Indian Participants from leading banking institutions.

There was a confirmed attendee from Iran but due to visa issues, the said person was unable to leave for India and join the workshop.

SCOPE, CONTENT, METHODOLOGY

Mr. D.M. Rupasinghe  opened the workshop with a lecture on the importance of productivity measurement and management in the banking sector. This was followed by Dr. D.N. Pathak,  who spoke on the basis and dynamics of government business allocation among banks (a phenomenon which India shares with the Philippines).

Very interesting practical experiences in enacting measures to enhance productivity and efficiency in the banking sector were shared by Mr. Koh Moo Yang  of Maybank, Malaysia’s largest commercial bank. He described the system they have put in place to identify key measurements by functional area, with performance appraisal and corresponding personnel movements (lateral, vertical, or worse, out), which is tailored to the intricacies in the demands required by each functional area. The resulting numbers, interpretable uniformly, provides management with an easy-to-use dashboard to inform decisions on personnel movements.

Among the participants, Dr. Saibal Ghosh  of India’s central bank became an impromptu resource person when he shared during the group discussions and presentations certain econometric techniques they have been using to measure productivity. Essentially using an adaptation of the Cobb-Douglas production function known as the Levinson-Petrin model  of endogeniety, Dr. Ghosh explained that they in the Reserve Bank of India (RBI) had proposed the use of this model for productivity measurement in Indian banks since the data needed for this approach are readily available. In the case of the Philippines, for instance, GVA data are available across all industry groups, including the services sector (of which banking and financial services is a part), and can be easily deployed for use among Philippine banks that seek to accurately measure productivity and efficiency using a system that is both easy to use while at the same time able to withstand an acceptable level of academic and practical scrutiny, subjecting itself to academic rigor.

Another approach they proposed was to generate a pure number between 0 and 1 – the former being the worst possible score and the latter being the best.  To do this, a bank may decide to include certain variables representing indicators or indexes of areas of bank operations, such as standard operating ratios (i.e., returns to assets, equity, investment, leverage, inter alia) as well other business indicators such as number of branches, amount or volume of business per branch, etc., adding as many indicators as may be allowed by available data as well as the number and capability of bank staff that may be needed to do this analysis.

OUTCOMES AND EVALUATION

This is the APO’s first-ever undertaking with respect to the banking and financial services sector. Therefore, it is fairly obvious that all of the participants as well as the organizers themselves were hesitant about how to proceed further. This hesitation was assuaged by the fact that, since both the participants and the APO itself were facing a steep learning curve, there would be many opportunities to learn from each other as they try to “sell” the concepts and practices learned during the workshop in their respective banks, as well as their respective countries (in the case of regulators and other government personnel overseeing or being concerned with the banking sector).

In my particular case, I was able to reacquaint myself with the use of statistical tools and mathematical modeling techniques that would be useful in developing useful and practical yet academically sound means of measuring and managing bank productivity. In this sense, the project was also able to meet its objectives of imparting knowledge and understanding of why measuring bank productivity is important, and what principles and techniques would be most helpful in measuring and managing bank productivity in the participants’ respective institutions and countries.

In particular, many of the participants found the practical approaches used by Maybank (through Mr. Koh as one of the speakers during Day 1) and HDFC Bank Limited of India (through workshop participant Mr. Jimmy D’Souza, Deputy Vice-President, during his presentation) very interesting. The participants also found very insightful the theoretical and practical approaches related by Dr. Ghosh of the RBI as narrated earlier.

RECOMMENDATIONS AND ACTION STEPS

One of the general recommendations of the participants to APO and APO member countries was to maintain continuous contact with each other, particularly with respect to exchanging notes, observations, and reflections on the implementation of bank productivity measurement and management efforts in their respective banks and countries.

There was a proposal to APO for it to fund a get-together of this workshop’s participants a year after, sometime in November or December 2015, to formalize in a more structured learning environment the lessons that have been gathered from a year’s undertaking to more thoroughly implement bank productivity measurement and management.

In the case of the Philippines, particularly DAP, we will need to echo this workshop and its results to the local banking community, specifically the Supervision and Examination Sector (SES) of the Bangko Sentral ng Pilipinas (BSP), which should be interested in the rationale, principles, methods, and techniques of bank productivity measurement and management. Beforehand, however, it would be best to see how bank productivity can be positioned as a policy objective, perhaps as an amendment under the Philippine Development Plan (PDP).

Consultations with the Policy Planning Staff of the National Economic Development Authority (NEDA) can be done to incorporate bank productivity into the national objectives. In particular, the NEDA National Policy and Planning Staff should be very interested in advancing the macro objectives of the PDP through greater bank productivity.

Together with NEDA, we can meet with the BSP-SES in order to put forward the case for bank productivity and efficiency. In particular, it should be argued that, with the coming implementation of greater economic integration within the Association of Southeast Asian Nations (ASEAN), as well as the President’s signing into law in July this year of Republic Act No. 10641.  Improving bank operations in the specific area of productivity and efficiency will be critical in this regard because of the level of measurement, monitoring and evaluation, review and retooling, that I have seen the banks in India as well as those in other countries in the region undertake in the area of bank productivity.

While we hope that we do not create blanket standards to cover the entire industry and correspondingly create a “penal” system to sanction those banks that do not conform to the said standards, we instead wish to encourage the leveling up of the country’s bank performance against global benchmarks by highlighting TFP along with other means such as human capital productivity, lean productivity, Six Sigma, 5 S’s, Kaizen, and other methodologies of productivity and efficiency promotion that previously were associated solely with the manufacturing sector. It is the APO’s appreciation that these methodologies can be applied as well in other economically productive settings. It is my understanding and belief that this is true and desirable as well.

SUBMITTED BY

REUEL HERMOSO
Fellow
Development Academy of the Philippines

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