Mumbai: Rana Kapoor, founder and chief executive officer (CEO) of the seven-year-old Yes Bank Ltd, India’s fastest growing private bank, said the lender is focusing hard on low-cost funds and will get the benefit of it when the Reserve Bank of India (RBI) frees savings bank interest rates.
Currently, the industry pays a 4% rate on savings deposits, but once the rate is freed, Yes Bank can pay 6-6.5% on such deposits. “It will be a colossal opportunity for a bank like ours,” he said in an interview.
Kapoor, whose 26.7% stake in Yes Bank is valued at Rs 2,650 crore, said he has no plans to cash out “for a very long time to come”. Edited excerpts:
Are you a bank or a non-banking finance company? You have been raising high-cost wholesale deposits to lend. How long can you sustain it?
The key point is we are showing sustainable growth, diversity of risks and diversity of assets as far as our business and financial model are concerned. Our net NPA (non-performing assets) as a percentage of loans for the fiscal year ending in March 2011 was 0.03%—the lowest in the industry.
We have built this bank in seven years from scratch. We have had to resort to market borrowings, but now the granularity of our liability base is spread over various relationship segments in the bank and our dependence on the CD (certificates of deposit) market is only slightly more than 10%. Our exposure to interbank call money market is very marginal.
Succession questions: Kapoor says he can think of at least three or four colleagues who are eligible at some time in the future to take over from him. Photo Abhijit Bhatlekar/Mint
The good thing is that we are seeing our branch liabilities rapidly augmenting. We closed fiscal 2011 with the Casa (current and savings accounts) of around 10% and retail liabilities slightly more than 27%. The recurring nature of our liability base has actually been very stable during the (2009 financial) crisis and has shown fantastic traction in the post-crisis period.
Any liquidity risk?
I would classify our liquidity risk at somewhere between low to moderate.
Don’t you run any asset-liability mismatches?
On the contrary, our asset-liability profile has a structural positive mismatch because the average tenure of our deposit base is about 21 months and loans about 18 month. Also, it is important to realize that almost 60% of our loans are linked to our PLR (prime lending rate), which means that we have limited pricing risk. The balance loans are fixed-rate loans, but they are reset within one year.
Your Casa is about 10.5%, the lowest in the Indian banking industry. If you can’t raise that substantially, you will find it difficult to survive in this market.
Casa is absolutely intrinsic to our growth strategy. In fact, our five-year growth plan revolves around liability growth. In 2010, our Casa grew by almost 99% and total deposits grew by 106%. In 2011, Casa grew by 69%, but total deposits grew in excess of 71%.
As a relatively young and emerging bank, it is important for us to build granularity of deposits across all businesses in market segments. We are extremely confident that by 2015, we should endeavour towards achieving 30% Casa. To achieve that, all the building blocks are in—creative technologies, training of people, the payments architecture, roll-out of branches, cash management mandates.
Because of higher cost of funds, your net interest margin (NIM) is a pretty low 2.8%. With interest rates going up, won’t your NIM be under pressure?
I want to make one point that within Casa, over 80% for us is CA (current accounts) and the balance 20% is SA (savings accounts). Economically, the value of our 10% Casa is more than the equivalent of a 15-16% Casa in those banks which have more SA than CA. When savings rates get deregulated, it will be a colossal opportunity for a bank like ours.
We will pay more as we believe that savings rates should be inflation neutral.
How much will you pay?
We would like to believe that we would benchmark this somewhat with policy rates as well as the new normal inflation. In our assessment, the new normal in inflation for the next one or two years may well be 6-6.5%. I won’t be surprised if our rates hover around those levels.
Roughly every one-and-a-half years you enter the market to raise money. This year, too, your board has cleared a $500 million (Rs 2,235 crore today) equity issue plan. Is this a way of generating cheap money to support your growth? How long can you sustain valuation after so much of dilution?
To fund growth and maintain a healthy capital adequacy level in conformity with the Basel II norms, it is imperative that banks raise money —both tier I core capital and tier II hybrid capital. It has not affected our return on equity (RoE). Baring one quarter, in the past three years, our RoE has been stable.
In one quarter, after our QIP (qualified institutional placement) in January 2010, our RoE was 19.6, but consistently in 11 quarters it has been between 21% and 22%. The earnings have not been diluted.
Our ability to raise capital is a reflection of shareholders’ support. In the first five years, we retained 100% of our earnings and started paying dividend only after that.
Rabobank had sold a substantial part of its stake in Yes Bank last year, but it still holds 4.7%. It also plans to enter India on its own. What’s the real story?
Rabo came into Yes Bank as a key financial investor with one board seat. They always had an aspiration to build a stand-alone India model after having experienced India through the Rabo India Finance venture, where I was the CEO earlier. Most definitely they saw that the opportunity in India has been very compelling after whatever modest success we have been able to achieve at Yes Bank.
In accordance with their board plans, they have gone in for an independent licence and in accordance with RBI requirement, they had to reduce ownership below 5%. This was done in June 2010. They are at best now a passive investor with a less than 5% stake.
Will Rabo continue to hold the stake?
At least they maintain that they would like to keep it this way.
Do you have any model in front of you?
By 2015, we should be very balanced in terms of the overall composition of assets—our corporate business, which is 67% now, should be about 40% and the mid-market SME (small and medium enterprises) part of the bank should grow from 23% to 30%. The balance 30% will be retail.
The two banks that we constantly benchmark ourselves against are Axis Bank and HDFC Bank. We would like to believe that we will be a best of breed combination of both by 2015.
To achieve the retail business target, you need to grow at about 97% CAGR (compounded annual growth rate). Is it achievable?
In 2010, retail business combined with branch banking was just about 5% of our total advances. In 2011, it constitutes 12% and our strategy is to increase that to 30% by 2015. It is very doable because we are on track. We have built about 100 branches in the last 12 months and plan to raise the branch network to 750 by September 2015.
The RBI norm says that for every three branches you set up in urban India, you would need to have one rural branch. Is it in sync with your model?
There is also a dispensation from RBI that enables us to actually choose such branches between tier III and tier VI centres. Our people in branch banking and retail banking actually have identified some very promising locations, which are emerging rapidly. We see lots of agri pockets in Maharashtra, Gujarat, Rajasthan, parts of Madhya Pradesh, Haryana, parts of Uttar Pradesh where our inclusive and social banking division is working towards building viable models.
So whether these are technology-driven or bricks and mortar branches or a combination of both, supported by business correspondents— there is a compelling model. Inclusive banking is going to be a profitable model. It may take the next three years.
You are talking about inclusive banking, but you recalled Rs 100 crore worth of loans from the troubled microfinance institutions.
We had one or two instances in early January where we found that a couple of microlenders, which subsequently got into CDRs (corporate debt restructurings), were collecting (loan repayments) faster than disbursing (loans). Please remember that in certain companies, the collections were fairly normal except in one state. So companies were sitting on cash and not disbursing the cash towards new loans. It was important in a couple of cases to actually get those loans repaid, but we have been equally fast in terms of new disbursements.
What is your total exposure to the microfinance sector?
About Rs 250 crore. We are working increasingly towards securitized structures.
SMEs are quite vulnerable to an economic slowdown. Do you see the quality of assets suffering this fiscal?
At present, our SME exposure is just around 10% or so.
As big as your exposure to retail?
Well, actually more than that. At this point, the SME segment is one business that we really like. We have a model supported by well-trained relationship managers and credit specialists, who were deployed on a regional basis. We are sectoral and knowledge-driven in the implementation of our strategy and I must say that the SME segment is really driven by owner-manager-partners and the owners basically see their business as their lifeline. The SMEs are susceptible to economic cycles, but they change gear… There may be some delays…
Are you seeing such delays?
Actually we see that the survival instincts of SMEs are by far the best in our country.
We need to customize lending packages; need to know the promoters, owners, managers of these SMEs. They have the ability. They are entrepreneurs; run low-cost structures and I think this is the segment we have to invest in.
Your Wharton-educated daughter Rakhi has joined the bank. She is an entrepreneur and is learning the tricks of the trade here.
Rakhi has done her MBA (Master of Business Administration) in entrepreneurial management.
So is there a sort of informal succession plan?
You have six years to retire. Will you use this period to groom Rakhi?
My daughter wanted to train because this is an enterprising platform.
But your other daughter, an entrepreneur, is doing some other work.
Two of my three daughters have completed their education and both of them want to be women business leaders. The second one is training with me. They will be on their own at some stage.
So Rakhi will not succeed you in this bank?
The important thing, I will tell you very honestly, is beyond ownership. Yes Bank has very divine intervention in my professional life as well as in the lives of many of my top management colleagues and partners, and I think the institutionalization of Yes Bank today is its biggest strength. I can think of at least three or four of my colleagues who are eligible at some time in the future to take over from me.
There isn’t any succession plan in the very short term that we are contemplating. I personally don’t want to see anybody in the family being involved in any form (in running the bank).
You own 26.7% in Yes Bank. The market value of your stake is around Rs 2,650 crore. Are you looking for an opportune moment to cash out? This is the market perception and the popular belief is that you’re drumming up the bank’s valuation for this.
I want to be very, very upfront with you on this issue. Yes Bank is a beautiful professional journey and I think the sustainability of this model, the endurance of this model, and the fact that it has performed best during and post- (financial) crisis definitely reflect on its core business and financial strengths. We have a very long-term horizon in terms of building the bank.
So the entrepreneur in Rana Kapoor will never say let’s cash out and do something else?
I have no plan to monetize my stake for a very long time to come. I believe that banking is such a beautiful profession and you contribute to national development, if done properly. We’re banking sunrise sectors, knowledge sectors. There is so much to do. I want to work till 2020.
I really want to contribute with my management team to build the best quality bank of the world in India.
This is an edited transcript of an interview that was first telecast on Bloomberg UTV on Thursday.