The real entrepreneurship is in the extended pyramid

By Sourav Majumdar

Q: The results for the third quarter have just come in and they are very good. Since you took over there’s been quite a dramatic turnaround at the bank. What are the things you did which led to this?
A: The starting point of every such restructuring-if you call it that-is really the state of despair that one saw in the organisation. The key to this is always the team and though teamwork etc are clichés you go into the depth of these things and ask, what does a team really do? In our case I would say our turnaround if predicated on a powerful coalition of like-minded people. Q: All of them are from your former bank, ABN Amro…
A: Yes, all five of us came together. If you parachute a CEO, no matter of what quality, into an organization of 2,800 people which is seriously impaired, and you want to quickly turn it around, it can never be a one-man job. You can take a disparate team and hire the best from the market, but people who have worked together for decades is something else. That’s why the other key word in that definition is ‘a powerful coalition of like-minded people.’ The second element is you must have one common compelling objective. We had that: A turnaround story, impaired bank, bring it to the top. That was the common objective. From that we got into the strategic and tactical elements, what’s wrong, what’s right. It was not that the bank was a complete write-off. For somebody who came in from a foreign bank where, in a period of 12 years as CEO I could open only 30 branches, we suddenly saw 180 branches. So it was like a child in a toy shop. We have seen the power of 30, so what can we do with these 180. A lot of things were good. For instance, the vehicles finance business was the best in class. So we quickly assessed that. The rest of the bank was seriously impaired. There was no consumer banking, there was a potpourri of corporates here and there, low priced and completely unviable. So one is the management part, the rest is the pure technical banking part. You go through the balance sheet-why have you got the lowest yield and the highest cost. How do you reverse that? So we did some strategic planning which was very simple: we said we want to be a universal bank-corporates, consumer, assets, liabilities. So work on both sides of the balance sheet and be a universal bank with corporate and consumer banking. So no niche. The second strategic pillar was to be a very efficient distributor of third-party products. The third element was to use technology. Of course, everybody says they use technology and are tech-savvy. If you have a computer on your table, it’s tech savviness! So our derivative was to use technology to find, service and engage customers-it’s a very wide definition. You do data warehousing and see behaviors, servicing through technology most banks do. But the third element is critical-engaging customers. That element has played out in subsequent years because we knew we’re not a high street brand, nobody knows us, most people spell our name wrong or pronounce it wrong. So IndusInd becomes Indus Land, sometimes it becomes Industrial Bank! You don’t have a powerful brand or institutional backing which some of the big boys have. So you have to get into that mode of engagement. There were service propositions which came out of that under the overall idea of ‘responsive innovation’ which played out nicely. The technology part then extended into the fourth pillar, productivity. How do you process your business? Most products in banking are commoditized. So how do you differentiate? Our view was that products may be commoditized, but processes behind them cannot be commoditized. That can be customized  That is the differentiator. That’s played out in the responsive innovation part. The fourth pillar, therefore, was to change the processes and that results in innovation and productivity. Why do all the business in branches - they can be centralized  Then we broke it down into a very granular action plan. If you see what we presented to the board in March 2008, that had about 10 or 12 slides on strategy and about 30 slides on execution. A strategy is only as good as the determination with which you execute it. There was no rocket science. It was just good banking practices being brought in with determination and execution by a group of people. That is critical. People are surprised by the sharp turnaround. Q: This happened 14 years after the bank started operations…
A: Yes, it’s about quick execution of the turnaround strategy. Q: Were the problems also not because of governance issues? Ultimately it does boil down to good or bad governance, isn’t it?
A: Yes, hundred percent. If you saw the negotiations for this team to come in took nine months. It wasn’t about salaries or bonuses or options-they get settled very quickly. It was about governance. How will the bank be run, what level of autonomy will be given, what is the governance structure. And we were quite happy with the governance coming out of the board, but we said the executive management must have some degree of autonomy to implement business models, of course under the overall supervision of the board. So governance and perceptions about the governance in the market existed. I think it took us about two or three years for those perceptions to be killed. Q: Today it’s seen as a professional bank…A: Yes, so you must demonstrate professional behavior consistently. Professionalism is not about having MBAs. You will do what is good for the bank. Period. No other considerations. How you react to crises, how you manage problems. Six months after we came in, the Lehman crisis happened. You’re in the nascent stages of building your plan and the whole world collapses. So how do you react to it? We saw that as an opportunity to fix a few things. For instance, liquidity. It was a huge lesson. We said we will never get into a liquidity trap. Take the cost, but don’t get into a liquidity problem. We could make simultaneous changes. We said there should be one culture: A performance culture. The board supported us fully. They questioned us diligently too: Are these cowboys, shooting from the hip? Do they have substance behind what they’re saying? They knew we had experience, but did we have substance? A lot of that story about strategic chances was about communication too-upwards, sideways, downwards. A huge amount of communication had to be done, and mostly to the branches. Why are we making these changes, what is your role in them and how we will help you in the change process. I will give full marks to the consumer bank on this because within three months they had granular actions plans for each branch. Then there were webcasts, face-to-face meetings-we met all 180 branch managers. Cultural change can never be done through classrooms. It has to be demonstrated. Q: You’re now in the second three-year plan. Now the scenario is going to change pretty dramatically in the banking sector. How have you tweaked your strategy in the light of the new challenges?
A: The first three years were to restore health, respectability and profitability. I think our restructuring was completed in the first 12-18 months. The second planning cycle we started in 2011 was about bringing scale with profitability. Scaling up is very easy, but it’s vital to sustain profitability while doing that. The business model stabilized  we’ve got the products, services, capital, talent and infrastructure. Now it’s time to bring the scale into the products, volumes, branch network and expansion. That’s playing out now. We have one more year to go for that plan. As far as changes in the environment are concerned, those you have to build into your strategy. So while you plan for three years, you work for every quarter. Because every quarter there could be some change. There could be a regulatory change. But you have an overall plan and within that you keep tweaking it. Then there were a few gaps to be filled in the product profile. So we bought the credit cards business of Deutsche Bank, we tied up with HDFC for home loans. There are gold loans which are still left which we will launch in the next three months. We’ve then got to think of the plan after 2014. That has to take into account the fact that there will be a few more banks coming in. But you know, this whole bank story, the fresh licensing story, is slightly overplayed. If you were a Singapore where there are 30 banks and a limited population and the cake’s not growing, you’d worry. Here you’re part of a market which is expanding by 10-,15-,20 percent. So the cake is growing. You take a part of that growth and others will share it. People keep saying market shares are frozen. We’ve never bothered about market share. I am one of those believers that market share will never ensure profitability. Some of the biggest banks in the world are today on their knees – they had market share. It’s a question of viability while you grow. The market is growing you and allowing you to take share. So when someone opens an account with us, he doesn’t close his other account. He opens a second account. Then he sees how the second account plays out, how I sell to you. We have no problems being the second bank. We have no ego. We can be the third bank. Once you’re in, I will envelope you with my products and services. And we have the products and services. Then it is about responsive innovation and engaging customers. Q: Can you elaborate on the responsive innovation bit…
A: Take the most commoditized product, ATMs. You put in a card, put in your pin and draw cash. The only thing you bother about at an ATM is how crisp the notes are. Otherwise, cash is cash. So if there are five ATMs in one place, how do I make someone who is either my customer or is not, go to my ATM? In our marketing department, a youngster came up with a suggestion. He said there’s something nobody in the world gives: The choice of the money. It’s called Choice Money and we launched it 18 months ago. Choice Money said if you go to our ATM, a screen comes up on the machine and gives you six variations how you can draw your money in terms of Rs. 100, 500, 1000 notes etc. You press the button and the ATM throws out the combination of your choice. That’s called Choice Money. We branded it. It’s not a revolution - it can be copied. But what it does is it makes people remember us as the bank which gives you Choice Money. You may still be mis-spelling my name! (Laughs) Every six months we introduced innovations. Almost all of them are world firsts or market firsts. Choice Money is a world first. I’ve gone to the US and spoken to CEOs of large banks. They’ve never heard of this. Like this, there are five or six already implemented. All are based on the tagline aap ne chaha, hum ne kiya-you desired, we delivered. You never asked for it. We’re launching three more next month. One or two are revolutionary, on the way you sell products. These are small building blocks. We don’t claim they will revolutionize the market, customers will close their accounts and open accounts with us. But it starts tagging you with a certain tag. That’s how the brand is built. We don’t claim we’re a high street brand today, but maybe in three to five years, we will be. Q: Innovation clearly is powering your growth right now…
A: Yes, responsive innovation. It sounds high-flown, but there’s a meaning to it. It’s pro-active innovation. We’re telling people to keep watching this space. Q: On the portfolio side, vehicle financing is a big play. But overall, how have you derisked yourself in these times?
A: Half the book is retail, which was dominated by vehicle financing. But we have added elements like credit cards and loan against properties to it. Gold loans will now come in. There’s no derisking needed. What is needed is diversification. People think of vehicles and always think of trucks. We finance everything on wheels. We’re not captive to the Hinduja group. We finance two trucks of Tata for every truck of Ashok Leyland. In line with market share, what our customers demand. We finance two-wheelers to eight-wheelers, on-the-road vehicles to off-the-road vehicles. That itself is a diversification. It’s not commercial vehicles. It’s vehicles. Then there is large diversification in the corporate side. So large corporates, medium sized corporates and very small corporates. Financial institutions and public sector. Those have been built from scratch. Our revenue streams are very diversified. You cannot say we’re either a retail or a corporate bank. Q: On the liabilities side, what is the retail-wholesale break-up?
A: That’s again about 50-50. Fifty percent of our liabilities are corporate, what they call bulk, and 50 percent are retail. Of this 28 percent are current accounts and savings accounts (CASA) and 22 percent are others like retail fixed deposits etc. The total customer base is about four million: Two million are borrowing customers and the other two million depositor customers. So scale is coming. The balance sheet footage as of the third quarter of FY2013 is close to Rs. 70,000 crore. Q: So you’re a bit more than mid-sized now?
A: But still mid-sized. When you cross Rs.100,000 crore on balance sheet footage, you say you’re OK. The big boys are far ahead on balance sheet size, and that’ll never be a catch-up game. Unless something inorganic happens. Q: Is that a possibility?
A: Most definitely. Today, we have the acquisition currency. The market capitalisation today is Rs. 22,000 crore. When we came in it was Rs. 1,200 crore. So it’s grown in four and a half years. We also have the management currency. It’s not just the five guys who came in doing things. We have 12,000 people in the bank now, from 2,800 when we came in. We’ve built layers. A lot of them are from ABN Amro, but that’s not a negative. The first two layers are like-minded. The new third line we’re developing may not be that like-minded because they’re coming from different backgrounds. So we’re telling our HR to help them become a like-minded team. We keep looking, but nothing is available. There’s just a clutch of banks, out of south India and most want to carve their own destiny still. If it becomes a reality then suddenly we’re a strong suitor. But we’re not a seller. We have very deep-pocketed promoters. They like the financial services space, and have diversified into media, oil, real estate. I don’t think they’re out to derive value out of this. They take pride in this that one of the clutch of companies has created value. The market cap is $4 billion. So we’re suitors. We have enough fuel in the tank to grow for the next three years, enough capital, very high capital adequacy of over 16 percent. Even our Tier I is over 15 percent. But we’ll grow at our own pace. Q: There’s a lot of entrepreneurial power being unleashed now. Where do you see your bank fitting in as entrepreneurial ambitions grow?
A: One big play happened in infrastructure. But unfortunately, those who financed that got themselves into a jam because the environment got vitiated. For instance, you’re so power-starved that you used to give a premium to banks which funded power. Today, analysts give you a discount because power plants are ready but there are no fuel linkages. That’s not the fault of banks. That’s a problem of the system. We don’t have a pathological dislike of infrastructure. In this country the largest pool of funding will have to go to infrastructure - power, water, telecom, airports. Banks will have to fund these. That is going to come back in favor, and we also want to play it. We like the area of health and wellness. The health part we want to and there’s one entrepreneur down south who revolutionised eye care and we raised equity for him and financing it. Education also we like, but there are some distorted models there and a little unorganised. But it’s a good area. Also hospitality. The power of India lies in the purchasing power of the population - you have to cater to that. Retailers, for instance, have a bad track record, something has gone wrong in the retailing model. Subhiksha folded up, others got into trouble. So we stayed away. But retailing is where the money should be. The real entrepreneurship for banking is going to come from the extended part of the pyramid. Everyone talks of the bottom of the pyramid, but the bottom now extends in dotted lines into what we call the unbankable people. They are going to become bankable. One hundred percent. A lot of that is going to be funnelled through the banking system. It’s already starting with the cash transfer scheme etc. How quickly are the unbankable going to become bankable. Financial inclusion today seems like an obligation but if you bundle together lending, payment and savings products, these people will have enough money to create savings and create businesses. This will take off if India has 8-9 percent growth for the next four-five years. There is entrepreneurship available there. We have a partnership model where we have tied up with not-for-profit microfinance institutions (MFIs). They want financing. We have tied up with three of these and more are coming up. The model is, you don’t have funding, I will give you the funding. Your forte is identifying the needy, helping disburse the money and collecting the money. So they can do that job and we will take them on our books. We will do the risk management, but they are good at originating. We lend to them at 11-12 percent, what I would lend to a corporate. The customer still has to pay much higher because the cost of the MFI has to be covered. RBI has allowed up to 26 percent. But the way we will do it is maybe 23-24 percent, so it’s lower than the limit. So if I lend at 22 percent, 10 percent I give the MFI to cover their costs, and 12 percent I keep. This is what I make from an ordinary customer as well. This lending is only to finance women and for entrepreneurship. Excerpts from this interview appeared in the February 2013 issue
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