Regional development banks in Indonesia face challenges from increased competition from commercial banks. To transform their business models and remain competitive, regional banks must focus on developing customer-centric operations, optimizing distribution channels, simplifying processes, and enabling innovation through technology. Key areas for regional banks to focus on include developing multi-channel lead generation, adopting customer-centric business models, integrating third-party solutions, and implementing scalable credit scoring mechanisms. Business transformation is necessary for regional banks to compete effectively with commercial banks in the future.

1. Nucleus Software Exports Limited
NOIDA
Macroeconomic changes driving the Regional Development Banks to play in Commercial
Banking Space
Next generation solution providing higher sustained performance for RDBs

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Introduction
After the financial crisis, the global banking sector has made progress towards stabilization. Banks
are focussing on new initiatives to improve customer offerings, revenue and cost structure.
However, the sector faces some difficult choices going forward as it strives for high performance and
operational efficiency. This is applicable not only to big commercial banks, but also for regional
development banks to a great extent. Macro-economic factors including changing regulations and
other factors are compelling these segment of banks towards business transformation.
Regional Development Banks- An overview
The regional development banks (BPDs) are focussed financial institutions providing financial and
technical assistance for development in low and middle-income countries within their regions. In
these banks finance is allocated through low-interest loans and grants for a range of development
sectors such as health, education, infrastructure, public administration, financial and private-sector
development, agriculture, and environmental and natural resource management.
Regional or sub-regional development banks are particularly valuable for small and medium sized
countries which have very limited power to negotiate with large global institutions and are unable to
influence them.
Key facts: ASBANDA Banks in Indonesia
The existence of Regional Bank in every province in Indonesia is getting stronger with the formation
of Regional Development Bank Association (RDBA) / Asosiasi Bank Pembangunan Daerah (Asbanda).
Some key facts for the Regional Banks formed through RDBA are: limited capital, low brand
awareness, innovation and closed target segment. The distribution of the lending asset size for the
different type of banks are shown in the table below:
Type
Total
number of
banks*
Total Lending
Asset size
($ MN)
State Owned 4 1,00,741
Foreign 35 97,261
Regional
Development
26 21, 658
Joint Venture 15 15,218
Private Non-
Commercial
30 8,913
Total 2,22,133
*Source: Central Bank of Indonesia
 There are 26 Regional Development Banks in 31 provinces in Indonesia. Although they have
high market shares in their respective regions, their contribution to the overall banking
system remains small, at about 9% of total banking assets as of end-20131
as shown in the
above graph.
1
http://www.reuters.com/article/2014/08/19/fitch-indonesian-regional-banks-challeng-
idUSFit71490020140819
41%
40%
9%
6% 4%
Market Share of Regional Development
Banks
State Owned
Foreign
Regional Development
Joint Venture
Private Non-Commercial

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 BPD recorded net profit of IDR9.36 trillion until November 2014 which is lower than IDR9.98
trillion profit recorded in the same period last year.
 The government has launched the BPD Transformation program to strengthen BPDs'
competitiveness and boost their contribution to regional development2
.
 This transformation of regional banks is also expected to boost the asset value of every BPD,
which has reached Rp433 trillion now.
Current challenges faced by Regional Development Banks and Priority
Actions required:
Regional banks are likely to be seriously challenged in this decade. 3
On the lending side of their
operations, a major challenge is competition from commercial banks. One of the top challenges that
nearly all banks (commercial, regional and others) face today4
is attracting new customers. Banks are
hungry for growth and finding new customers are one of their priorities. However, banks also
recognise the need to deepen their customer relationships and focus more on specific customer
outcomes. Thereby, enhancing customer relationship is the number one investment priority for
banks, globally. In the developing economy, such as Indonesia, R&D, innovation and new product
launch are some of the priority areas where regional development banks are currently focussing.
These banks need to do more to stay ahead of competition and make themselves well positioned to
succeed in the future. Some of the top priorities are:
 Developing a customer-centric business model
 Optimising distribution
 Simplifying business and operating models
 Obtaining an information advantage
 Enabling innovation, and the capabilities required to foster it
 Proactively managing risk, regulations and capital
It is evident from a survey conducted by PWC, that majority of bank executives believe that they
need to simplify many key processes in order to deliver an improved customer experience,
structurally lower cost and reduced levels of operational risk.
2
http://en.tempo.co/read/news/2015/05/26/056669550/Govt-Launches-BPD-Transformation-Program
3
http://www.caribank.org/uploads/publications-reports/statements-and-speeches/dr-compton-
bourne/SPEECH_DEVELOPMENT%20BANKS_OECS_ST_LUCIA_FEB_2010.pdf
4
As per PWC Survey

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Survey Result:
A majority of executives believe they need to simplify Bankers believe simplification will:
The simplification of processes in these banks will highly benefit them in achieving successful
business transformation. The four major benefits out of the transformation are (please see the
diagram below):
 Enhanced client experience
 Operational and cost efficiency
 Continuous improvement
 Risk mitigation
There are several examples where it is evident that transformation has brought immense benefits to
the banks. One such example is a leading bank in South East Asia which gained operational
efficiency by automating end to end loan process. This bank is focused on lower mass segment,
offering unsecured consumer lending particularly motorbike loans and personal loan. It wanted to
improve the origination efficiency and enhance customer experience. By automating the complete
Enhanced client experience
•Eliminate customer pain points
•Improve responsiveness to clients
•Streamline process
Operational and cost
efficiency
•Reduce cost by driving out variability
•Create capacity and scale
•Provide cost-effective services
Continuous improvement
•Define standard processes
•Train the organization in process-oriented thinking
•Instill a culture of continuous improvement into
organization
Risk mitigation
•Ensure consistent and auditable controls
•Align operating model to changing regulations
Benefits

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loan process it unlocked business growth potential by reducing 45% TAT. The Bank won the Celent
Model Bank Award for this project5
.
Another example is of PT Bank International Indonesia which undergone a transformation process
that includes investing in network and IT to set forth innovation. This bank got recognised by the IT
Banking Excellence Award 2013 from Warta Ekonomi magazine as the winner for the commercial
bank category. This award acknowledges that it has successfully implemented information
technology for banking operations.
Major Drivers for Business Transformation
Macro trends that create a greater impact on shaping the financial landscape of banking segment
are major drivers for this transformation. These are:
1. Demographic Change
2. Technological Innovation
3. Social and behavioural change
4. Rise of state directed capitalism
Demographic Change
Demographic changes will provide opportunities for growth and will require innovation to develop
new products and services. As per PWC survey, in next 30 years, it is expected that nearly 1.8 billion
people will move into cities, mostly in Asia and Africa, creating one of the most important new field
for financial services businesses.
Banking the unbanked segment will also play an important role in emerging markets such as
Indonesia as government is pushing this drive in order to provide economic benefits to all. This push
will drive new products and business models, and will become the primary focus of governmental or
state- sponsored institutions, particularly where the private sector is unable to fulfil the need.
Technological Innovation
A McKinsey & Company study found that customers using mobile and online banking more than
once a week are also over 60 percent more likely to be active retail branch users. Smart devices will
grow in importance reflecting banking on the go as the new trend. Also Biometrics (e.g. fingerprints,
voice recognition) will become commonplace in transaction authorisation, but will remain tied to a
replaceable physical device (e.g. smartphone).
5
http://www.strategyand.pwc.com/media/file/Strategyand_Transform-your-banks-operations-model.pdf

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Social and Behavioural Change
Customer centric banking is what banks will focus on. They will develop the ability to view customers
as a ‘segment of one’, recognising their uniqueness, and tailoring their offerings so that customers
view banks as ‘meeting their needs’ and not ‘pushing products’.
Rise of state directed Capitalism
Due to regulatory changes, the playing field will slowly shifts from global to local. There is a
considerable drive for change seen among RDBs in Indonesia with the introduction of a new
regulation that requires banks to direct at least 20% of their credit portfolio to the SME sector by
2018.
How the commercial banks are playing in the market: What RDBs
should do for Business Transformation?
Commercial banks have already started preparing themselves to enhance their most distinctive
operational capabilities and meet their transformation objectives. Regional banks need to develop a
view of the future landscape which will help them to be proactive for coming years. Below
mentioned are the prime areas, the Regional Development Banks must focus on:
Multi Channel
Lead generation
Customer
centric business
model
Integration with
3rd Party
Solution
Scalability
Credit Scoring
Mechanism

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 Multi-Channel Lead generation
The new era of lending will witness change in the mode of on-boarding customers in a bank.
Lead will be generated through smart ways as well as traditional way of branch walk-in.
Technological innovation such as smart phones, tablets are going to transform the banking
industry and will bring remotely located customers into a close network. This
metamorphosis has already started today and banks are trying to align themselves with this
change.
 Customer Centric Business Model
PWC finds during their survey that there is a growing awareness among the banks but a
significant gap lies in the preparedness. Many banks carry vast product sets, with subtle
differences, frequently not appreciated by customers. This consequently comes with a cost
in operations, technology, service and, at times, risk and regulatory challenges. Systems are
not modular in design, and therefore each variant adds to this complexity and cost.
 Integration with 3rd Party Solution
The new generation of banking requires systems to talk to each other. Banks need smooth
transition of business processes and applications. This in turn requires integration of
different modules such as lending solution, CBS, credit Bureau, Central Bank etc. This helps
the banks to get data from either side at a faster rate which in turn helps in taking faster
decisions.
 Scalability
To meet with the fast growing business need of banks, solution need to have the capability to
cope under increased or expanding workload. A system that scales well will be able to
maintain or even increase its level of performance or efficiency when tested by larger
operational demands. There are broadly two levels, where the system must handle increased
demands and be scalable:
o Products - Scalable system enables successful launch of new products in the market.
o Users - More customers mean more business and thus the system should have
flexibility for accommodating more users in the system.
 Credit Scoring Mechanism
o 360 degree view of the customer - A complete view of customer from every angle is
necessary in order to evaluate the customer’s present condition and willingness or
intension of repayment.
o Appropriate parameters for credit scoring- To get a holistic picture of the customer,
it is one of the important criteria to select proper parameters. Relying solely on few
parameters are not sufficient enough to take decisions.
o NPA reduction is also a by-
product of effective credit
scoring. Once the right
assessment of customer is
done, it is easy from the
bank’s perspective to take
up the decision of loan
approval.
Source: KPMG Report

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These attributes are important in making Regional Development Banks future ready and assists them
to strategize in order to deal with the transforming landscape. These banks need to act proactively
and create agility, to adapt to rapid changes. Regional development Banks need to redesign their
business model, end-to-end so that they can compete in the commercial bank space in coming years.
Similar to big commercial banks they need to rebuild themselves to accomplish their objective.
This can be done through ‘Transformation’ which can help banks experience a step change in
growing revenue and profits. It is the key towards success now. Transformation will also equip banks
with the new skills and ways of working that the competitive landscape will gradually demand. By
moving ahead with plans, Regional Development Banks will find it easier to compete with large
commercial banks.
While there are variety of transformation and modernisation solutions available to these banks,
banks must focus firstly on automation process as a part of transformation and then should move
towards operational aspects and analyse areas for further simplification. This journey of these banks
must also consider the goal and vision of these banks. To bring out significant results, these banks
need to adopt best practises of the industry which will lead them to growth and innovation.

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Jayant Tondon
Senior Lending Product Manager, Nucleus Software
Jayant is the Senior Product Manager at Nucleus Software where he is
responsible for managing P&L for FinnOne Neo for North America and SEA
region. He has 17 years of experience in core banking domain and banking
product management such as Retail Banking Operations, P&L
Management, Audit, Risk and Regulatory Management, Business Analysis
and Product Implementation. Before joining Nucleus, he has worked with
leading banks like ICICI and IDBI.
Author e-mail id: jayant.tondon@nucleussoftware.com
Rimi Mandal
Lending Product Manager, Nucleus Software
Rimi is a Product Manager at Nucleus Software where she is responsible
for managing P&L for FinnOne Neo for South East Asia. She is a PGDM
(MBA) holder from IIM Lucknow and has specialized in Systems and
Marketing. Prior to her MBA she worked with Bank of Baroda for 1.5 year
as an Assistant Manager.
Author e-mail id: rimi.mandal@nucleussoftware.com
Arup Das
Lending Product Head (P&L Management), Nucleus Software
Arup is the Vice President and Lending Product Head (P&L Management)
at Nucleus Software where he is responsible to lead the flagship product
to the next level of global leadership. Before joining Nucleus, he has
played various roles in strategy and product management with leading
companies like CISCO, IPValue and Mphasis.
Author e-mail id: arup.das@nucleussoftware.com