Veteran banker Samit Ghosh built Ujjivan Microfinance from scratch at a time microlending wasn’t a popular organised business. Over years, the company grew in size to become a formidable institution in the microlending space and later into a small finance bank (SFB).
During his long career as a banker, Ghosh had held key positions across Citibank, Standard Chartered and the HDFC Bank. Ghosh entered the microfinance business in 2004-05 by founding Ujjivan Financial Services, the holding company of Ujjivan Small Finance Bank.
Fifteen years after he entered the MFI business and three years after Ujivan became an SFB, a fresh set of challenges are emerging before Samit Ghosh and the company he built.
The disquiet at the top
Ghosh is known to speak his heart. In an interview with Moneycontrol on April 30, Ghosh didn’t mince words about his ‘disappointments’.
Early that week, shareholders had rejected a special resolution to appoint him as Managing Director and Chief Executive Officer (MD&CEO) of Ujjivan Financial Services. The special resolution received 70 percent of the valid votes in favour as against the required minimum of 75 percent
Ghosh said. “For one day, I was quite upset. I didn’t want to take this job. The company said since the MD & CEO position has fallen vacant, why don’t you take up the additional charge, we will get someone else soon.”
In the same interview, Ghosh also left some hints about the widening differences between the holding company and the management of the new bank. “After we became a bank, we (Ujjivan Financial Services which is the holding company of Ujjivan Small Finance Bank) took a back seat,” said Ghosh.
“We have a lot of common shareholders. This is a lesson for us that we should not have taken our eyes off the ball. We should have maintained relations with our investors. At the end of the day, being a holding company, we cannot directly intervene in the bank’s operations. But definitely, I will be actively in touch with the investors,” said Ghosh in the interview.
The friction at the top between the founders and the top management has been there for a while. There have been a series of exits at middle and senior-level management. Nitin Chugh, who took over as CEO in December 2019, resigned on August 19, 2021. That wasn’t the first top-level exit though.
A week ago, Harish Devarajan—one of the directors—had quit. In February this year, B Mahapatra had quit as Chairman of Ujjivan Small Finance Bank. Other major exits this year so far include independent directors and non-executive directors including Vandana Viswanathan, Jayanta Kumar Basu, Biswamohan Mahapatra, Ittira Davis and Mona Kachhwaha.
What really happened?
When contacted for comment for this story, Ghosh refused to comment saying, “I’m sorry. But I’m under mouna brata.”
However, people familiar with the whole episode says the problem was primarily based on the difference of opinions in the way the decisions were taken at operational level. The differences were mainly on two counts—the handling of financials particularly with respect to the quality of the loan book and the relations with some of the old investors of Ujjivan.
“There was a divide between what the founders expected from the bank management and what happened later. The disquiet at the top was obvious from the early days of bank formation. Now things have come to a head,” said a senior industry official who didn’t want to be named.
Chugh’s resignation, although personal reasons were cited, too should be seen in the context of these differences. “ In our view, apart from the bank's underperformance, some niggling issues with the old management and his incompatible new-age management style in the still MFI-dominated old school bank, could also have contributed to the resignation,” said Emkay analysts in a note.
Citing a conference call after Chugh’s resignation, which was presided by Ghosh, Emkay said it was mainly due to the bank's persistent underperformance on the asset-quality front, delayed recognition/correction of NPAs in MFI, and large-scale attrition at the lower-middle level that Chugh had to leave. Chugh was earlier with HDFC Bank as digital banking head.
Insiders confirm that Ghosh has been conservative in his approach when it comes to asset quality management and provisioning. The new management wasn’t. The bank’s management’s actions didn’t resonate well with Ghosh. The differences came to a head when COVID hit the economy impacting the repayment ability of Ujjivan’s borrowers.
The bank's overall recognised stress pool stands at 15.6 percent of the loan book (including GNPA of 9.8 percent/restructured loans of 5.8 percent) and the portfolio-at-risk has swelled to 30 percent as of June 2021.
The underprovisioning and deterioration in asset quality didn’t go well with the founders.
But the problem is not limited to the top level exits. The bank has faced a massive exodus of lower-middle level employees, which has more to do with the work environment than remuneration, points out the Emkay note. “Mr. Ghosh indicated that the bank would be keen to re-onboard the employees, unless they have taken jobs somewhere else,” said the Emaky note.
The industry official quoted above said post the exit of Chugh and other senior-level staff, some section of the employees who left the firm may return.
Asset quality worries
It is not just about the tussle at the top, but also the emerging asset quality issues presented by a deadly pandemic. “When Chugh was appointed, the market was expecting that he will be able to replicate the performance in his previous organisations but an SFB can’t compete with banks when it comes to cost of funds,” said Sidhharth Purohit, analyst at Mumbai-based SMC Global securities.
Microcredit is a high-risk business. Collections suffer during economic downturns before the impact is felt in larger organisations, said Purohit.
“Ujjivan has been trying to diversify into different areas but that is not really happening. Coupled with the problems in microcredit, COVID acted as a double whammy,” said Purohit.
According to Ujjivan SFB’s June quarter investor presentation, microbanking constitutes 68 percent of the gross advances. This portfolio grew 14 percent on a year-on-year basis.
Beyond the cold war between the management and Ujjivan founders, the small finance bank will have to gear up for a potential asset quality shock. A third wave could mean more troubles for Ghosh’s firm.