Mumbai: One of India’s older private sector banks, IndusInd Bank Ltd, has been under the Reserve Bank of India’s (RBI) glare for the stake of its promoters, the Hinduja Group, at 25.63%, is well in excess of the regulatory prescription of 10%.
The bank’s repeated underperformance has also been a concern to the regulator.
Since the merger of Ashok Leyland Finance (ALF) with IndusInd, the bank’s branch network has not grown significantly. Its branch network stands at 180. To initiate a turnaround, the Hindujas then appointed a new management, which was largely drawn from a foreign bank.
Since Romesh Sobti, ex- country head of ABN Amro Bank, took over as managing director and chief executive, speculation has been ripe that he has been brought in by the promoters to make cosmetic changes and eventually find a suitor for IndusInd.
Empowered lot: Managing director and CEO of IndusInd Bank Romesh Sobti says the executive management has full powers to work autonomously within the framework of the policies laid down by the board. (Photograph: Ashesh Shah / Mint
In an interview, Sobti insists there is no plan to sell the bank. He says that if there are any opportunities for deals in the future, IndusInd will be a “suitor” and not a target, be it three or six years from now. In the first quarter of 2008-09, the bank posted a profit of Rs19.10 crore. Edited excerpts:
There is a market perception that you have been given a three-year mandate to brush up IndusInd Bank and find a good suitor for it.
As far as selling the bank is concerned, I won’t do it myself. If the track record of my team is anything to go by, then we have taken the challenge of building IndusInd Bank into a robust and profitable bank. My team is thrilled of the growth opportunity within the bank. We are not here to tread water. There is no proposition to sell. IndusInd will be a suitor, be it three, or six years down the line.
The so-called market perception of a three-year mandate being given to me, let me tell you—I chose the three-year term, nobody else. I cross the 60-mark three years from now. According to me, if you give yourself a time frame, you get very focused. Three years is a good time to make things work. I could choose to continue after three years. It is my choice. This bank has good ingredients for a turnaround, there’s a need to press the right buttons.
IndusInd Bank is always referred to as the bank run by the Hindujas. How much operational freedom do you have?
I ask you a question. Are they (Hindujas) around? The executive management has full powers to work autonomously within the framework of the policies lead down by the board. It will be extremely foolish for a promoter to get in an experienced team and then shackle their hands and ask them to do a turnaround.
I cannot talk of the past, but this management team has been empowered by the board, which has been validated by the executive board. I have seen nothing in these six months which in anyway defeats the promise made when we were appointed. I feel on the freedom to execute there is absolutely no interference. Nobody in this institution takes instructions from anybody other than the executive board.
Are the promoters open to divesting their holding in the bank?
They have been diluting every year. It is a process and they are engaged in it. Currently, they hold 25.63%.
Recently, we raised Rs222 crore through a global depository receipt offering, which led to 3% dilution in shareholding. I won’t be surprised if we go to the market again before the end of this fiscal, if we get the assets.
I am sure we will have full support from the board and the promoters. We should see at least 10% dilution in overall shareholding every year; however, the timing will depend on the need for capital. We plan to grow our balance sheet from the existing Rs27,000 crore to Rs70,000 crore in three years’ time. The bank expects to grow at 40-45% annually.
Has the Reserve Bank of India not issued any fresh branch licences to the bank because of the high promoter holding?
We have 180 branches and 410 marketing outlets, which we acquired from ALF that sell asset products. We used the last tranche of branch licences granted to us just about six weeks ago. We have put in fresh application for branches. There is no relationship between the promoter holding and the bank getting fresh branch licences. It has never been stated, or uttered to us by the regulator.
Majority of your top management team come from ABN Amro...
We did 700 hirings in first quarter, out of which 400 physically joined. We have been sourcing talent from dozens of banks, not just one bank. Hence, it’s very diversified. We have not targeted any single bank. We have only chosen what we thought were the best. If it comes from a particular bank, so be it. We are in a growth phase and if the outside talent buys the growth story, it’s good for us. Considering that the senior management of a multinational bank have taken the jump, they are also willing to do so.
There is an impression that some executives have come at salaries that are equivalent to those in a foreign bank, which is not sustainable for a bank of your size.
They will pay for themselves. We are very wary of creating a foreign bank’s cost structure here. We have no intentions of creating a mini ABN Amro here. We have not got talent on the basis of salaries. By and large the salaries are capped, which means most people have come at same salaries. We have bought talent based on the growth story and the growth story will be embedded in employee stock options (Esops). There is an Esop pool, which is spread over hundreds of people. It is very democratized. We will want the market to reward them; that’s the way we are running. We are very sensitive to cost management; we want to keep the mentality of a small private sector bank. The Esop scheme is spilt to 200 existing bank employees, the values may be different.
What are the practices that you would want to improve in this bank?
Our business plan was predicated on productivity, profitability and efficiency. In the first quarter, we have executed these three principles by restructuring the organization and partially restructuring the balance sheet.
Our yields improved year-on-year by 124 basis points and quarter-on-quarter it improved by 20 basis points. This is on the balance sheet side. On the organization side, we have empowered our branch managers. I have a strong belief that an empowered branch manager can create health of the balance sheet and also positively impact the profit and loss account.
The basic purpose of the branch network is to garner deposits. Our branches had forgotten this. We have just reminded them of their primary focus. The bank has also worked to get its risk-reward relationships in place. We have, in this pursuit, repriced our corporate, small and medium enterprises, and business banking portfolios.
On the productivity side, we have done simple things like cost management through rationalization of vendors, renegotiation of procurement, looking at the charges and services schedule. Centralization of branches has helped us redeploy manpower. The first quarter has seen all these changes. The second quarter will now see product launches.
We have very small desire in gaining market share, our proposition is to ensure productive, profitable and efficient growth.
How would you substantiate the rising cost base of the bank?
For a bank, which is in the investment stage, the revenue growth has to be faster than cost. Cost bookings have to be phased out. There has to be a variable element to cost. A large element of variable cost comes from manpower. Earn more, take home more—that’s how we should work. The variable to fixed pay ratio should be 25:75. In most organizations, it is 10:90. There should be a variable element to cost.
With new processes and systems in place, will old employees be able to adjust to the new environment?
It’s a challenge. Upgrading the skills of existing workforce is the biggest challenge. We are a mixed bag of good people—average and below average. Through training over a period of time we will attempt to upgrade the skills of the below-average group of employees. I don’t believe in the hire and fire strategy.
What will be your business strategy?
We are going to grow our consumer business as much as corporate finance. The balance sheet will be split 50-50 on these. Every Rs100 lent will be equally distributed to retail and corporate clients. We were never a large player in mortgages and do not have credit cards. We have no intentions of launching it in the next 12 months.
We are not entering the personal loans segment on a standalone basis. We will market it to our existing bank clients. The bank has 800,000 clients in the consumer finance business. Our existing client base on the vehicle finance side has been risk validated.
We will give them working capital and top-up loans. We like our vehicle finance business. It has good margins and we will continue to grow this business.
The market is defensive on auto finance. We are not, because we can manage it better. We have domain knowledge in this space through the acquisition of Ashok Leyland Finance. Our delinquency is below 2%... According to the rating agency Crisil, delinquencies in the commercial vehicle sector are somewhere around 4.5%. Our consumer finance portfolio is niche in terms of product offerings.
Our approach on the consumer banking side is conservative and risk validated. We will continue to grow the corporate banking business, with strong focus on small and medium enterprises. We will also grow our current and saving account base from the existing 17% to around 30% over a period of three years.