Moneycontrol Pro Panorama | Here is another Ken for our bank Barbies

Banks, even the worst of them, are all dressed up to party in the loan market and the celebrations have already begun.

Dear Reader,

Last week we wrote why India’s banks resemble Barbies. A strong and shiny garb of capital has spruced up balance sheets amid decadal low delinquencies. Banks, even the worst of them, are all dressed up to party in the loan market and the celebrations have already begun.

Who wouldn’t want to be a Ken to these Barbies?

Enter Mahindra & Mahindra, the automobile giant that sells tractors with the same gusto as it does its newest SUV Thar. The company picked up a 3.5 percent minority stake in RBL Bank with a promise of buying more if the regulator allows. This has left several analysts scratching their heads. Why is M&M enamoured by a bank just when the automaker is shedding non-core and loss-making bets it had made earlier?

Remember, M&M already has a foot inside the loan market with its non-bank finance company Mahindra & Mahindra Financial Services. The NBFC has had a rough time, but is emerging stronger with a promise to scale up the business and take it further beyond its parent’s backyard.

The easy and logical explanation is that India’s conglomerates have always wanted an entry to the banking space, but have faced an immovable regulator on the other side. That hasn’t changed because for M&M to even take a back-entry labelled as a ‘strategic investment’, it requires the blessings of the Reserve Bank of India. But a banking licence is less attractive than it was before as the regulatory landscape of both banks and non-banks is similar now. NBFCs don’t have carte blanche in lending even though they are not as fiduciary as banks, and banks are not regulated to death either.

But why RBL Bank?

The lender has come a long way to become a growing pan-India private sector bank with over 500 branches. In this journey, it has had quite a few bumps and bruises. In FY22, the bank’s chief Vishwavir Ahuja unexpectedly left, and the regulator appointed a director on the board. Amid a cacophony of concerns over the bank’s loan book, a veteran distress assets specialist R Subramaniakumar took charge which only fuelled the worries. As of Q1 of the current financial year, RBL Bank reported a neat 43 percent increase in its net profit and a 21 percent loan book growth. Subramaniakumar has put to rest all speculations about the bank’s health.

This brings us to the likely motivation behind M&M’s stake purchase.

Note that lending as a business gives the best rewards at scale. The loan market currently is also the most crowded one, but it still gives the best bang for the buck. The co-lending model, floated by the regulator, is a quick way for banks and NBFCs to build scale and most lenders are eager to enter a handshake deal.

M&M’s home-grown Mahindra Finance needs to scale up and so does RBL Bank. A co-lending pact would work for them, but does not necessarily need a common investor. With the stake buy, M&M not only gets to invest in future high returns due to scale, but it also gets a slice of profits immediately from both businesses.

That should suffice for the conglomerate until the regulator eases its stance over industrial houses entering banking. If that day never comes, the consolation prize is investing in a bank with a clean balance sheet at a time when lending has never looked better. For now, the regulator wants M&M to be “just Ken”.

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