Mumbai: India’s second largest lender by assets, ICICI Bank Ltd, is taking a close look at costs in an exercise that would help it save up to Rs1,300 crore in the fiscal year to next March, bank executives said.
Mumbai-based ICICI Bank, the country’s largest private sector lender, is also rejigging its business model as a result, driving more of its consumer business through its branch network rather than through the external selling agents it works with.
“We have been rationalizing our direct marketing agents and direct sales agents force, renegotiating rentals, wage management, and there are many idle assets in the organization in the form of offices and seats, which have also been rationalized,” said ICICI Bank executive director K. Ramkumar.
Changing framework:The ICICI Bank Towers in Mumbai. Prashanth Vishwanathan / Bloomberg
The genesis of this important strategic change goes back to a meeting in a London hotel in 2007, before the subprime mortgage crisis triggered by home-loan delinquencies in the US became a full-blown global financial maelstrom the following year. K.V. Kamath, who was then the bank’s managing director and chief executive, summoned his senior team to London while on his way back from the US. He told senior managers they had to pull up their socks because he suspected an economic storm was looming.
V. Vaidyanathan, then an executive director at ICICI Bank and now head of ICICI Prudential Life Insurance Co. Ltd, led the resultant cost-cutting exercise with a team consisting of various business heads. The bank termed the exercise waste reduction.
Ramkumar did not comment on the size of the savings that another ICICI Bank official, who didn’t want to be named, had told Mint about in an earlier meeting. An ICICI Bank spokesperson independently confirmed that the cost-trimming would yield a saving of Rs1,300 crore in 2009-10.
The bank reduced its expenses on external or direct marketing agents to Rs529 crore in fiscal 2009, down 65% from Rs1,524 crore in fiscal 2007, according to the bank’s annual financial statements.
Reduced role for agents
ICICI Bank has doubled its branch network to 1,400 from 750 over the past year, and aims to have 2,000 branches in the next 12 months.
“The bank branches, which earlier were just cost centres, will now become revenue centres. They would now, along with liabilities, also sell asset products,” said Ramkumar. Each branch manager will also “have profit and loss accountability”, he added.
As the bank widens this network, it hopes to make around 60% of its loan disbursals from its branches in the near future, up from 20-25% in previous years.
The lender has tightened the credit criteria for two-wheeler loans and is increasingly disbursing more of these from its branches. But it will not be easy for ICICI Bank to eliminate direct selling agents for its car loans business as this is driven by car dealerships.
“(However), the choice of the dealers and choice of direct marketing agents and the reward structure will be strongly aligned to credit quality and not volume,” the executive director said.
In fact, ICICI Bank has stopped writing as many loans as it did in the past. “We have understood that we made a mistake in unsecured lending and we are out of that business, and that has taken care of the direct marketing agents’ force,” Ramkumar said.
The bank is also renegotiating its loan collection structure. “Currently, it is an agency-led system. The bank is exploring if there is any other model which is consistent with our value and brand reputation,” said Ramkumar. “We are fundamentally altering the collection system to an analysis-based model and to a dignified persuasion-based model as against recovery-based collection. We do not want societal anger vented against us.”
Banks including ICICI Bank have in the past been criticized for strong-arm tactics employed by their loan collection agents against defaulters.
The process of change, which the bank hopes will further reduce the dependency on external agents, is being conceptualized and will take at least a year for implementation. When that happens, the bank expects its collection costs to be reduced as well.
Abizer Diwanji, head of financial services at KPMG India, the local arm of the global consulting and audit firm, says banks are shifting their focus from retail to corporate banking, which will require fewer direct marketing and selling agents.
Trim and cut
ICICI Bank had five offices in Mumbai, of which two were back offices. It owns only one of these offices; the rest were taken on rent. The bank has now consolidated all its backoffice work groups into the building it owns.
Of the remaining four rented premises, one was taken on a long-term lease at a rate favourable to the bank. The unit in this office invested in technology and efficiency and gave up almost 300 seats, which were later used to accommodate people from the other three rented premises. “We could thus give up almost one complete office with very high rentals, saving the bank several lakhs of rupees a month. (A) similar exercise was carried out across the top 10 cities, resulting in the benefits and advantages as mentioned earlier,” said Ramkumar.
“When we set up distribution in a high-cost economy, the cost at which the real estate comes is very high,” he added. “We are renegotiating rentals. There is still more juice to be taken out.”
ICICI has disposed of 50% of the filing system in its Bandra-Kurla complex office in Mumbai’s suburbs. Though this has not helped much in terms of savings, it enabled the bank to lay down an attitude of frugality among its employees.
ICICI Bank now promotes the use of e-statements and e-forms to reduce use of paper. It is migrating from direct mailers to emails and cellphone texts. The bank has even reduced the thickness of the paper used in its offices. Overnight stays while travelling on work have been prohibited.
Picking up the threads
The economic downturn and rising non-performing assets, or bad debts, had forced ICICI Bank to cut back its loan growth. The bank’s asset growth, at 35-40% in fiscal 2007, dipped to 15% in the year to 31 March 2008. The following year, its assets growth shrank to 5.14%. The bank’s net profit in fiscal 2009 fell nearly 10% from the previous year to Rs3,758 crore.
Its bad debt has also risen sharply. As on 31 March, non-performing advances stood at Rs4,553.94 crore, as against Rs3,490.55 crore a year earlier, and Rs1,992.04 crore at the end of fiscal 2007. Its shares have lost about half their value since closing at a high of Rs1,439.90 on 11 January 2008. On Friday, the shares ended at Rs713.75 on the Bombay Stock Exchange.
Still, Ramkumar said the bank has a 100-150 basis point advantage over other banks in terms of its cost structure. One basis point is one-hundredth of a percentage point.
“The slowdown has come as a blessing in disguise, giving us the chance to press the pause button and reassess. We have two years to size up,” he said.
The bank has decided not to issue stock options to its employees and bonuses to its top management this year, and has given a 3% increment to all employees—lower than at least 10% raises in previous years. Ramkumar said the bank has maintained its policy on performance-based pay, but the quantum of the payout will change.
“ICICI Bank has a history of outperforming the market and it was certain that they would have to tone down one day. The recent steps of no bonus and Esops (employee stock option plans)...I would term it as a correction,” said a senior executive with a consultancy firm, who didn’t want to be named. “The bank has been aggressive in growing its loan book and employee strength. Its salary hike has always been way above the industry levels, disrupting the banking industry practice... It had to correct.”
The bank’s workforce had increased to 40,000 last year from 27,000 in fiscal 2007. That has now decreased to 36,000.
Ashvin Parekh, a director at accounting and consultancy firm Ernst and Young, said Indian banks had not been hit as hard as global lenders.
“While cost-cutting in the global world was the need of the hour for survival, it was not so for the Indian banks,” said Parekh. “In India, the challenges were different, though asset quality is a concern... Banks are evaluating their investments made in various resources including people and infrastructure, and working towards improving efficiency levels.”