Mumbai: At the centre of Thrissur town in Kerala is the Swaraj Round, the hub around which the urban centre has developed. One of the long-standing fixtures on the roundabout is the statue of Mahalakshmi, the goddess of wealth, marking the headquarters of Dhanlaxmi Bank Ltd, established 86 years ago.
P.V. Mohanan, a senior executive and 35-year veteran with the lender, recalls how Dhanlaxmi was set up “to collect funds for the wedding of a poor Brahmin girl”. In the recent past, Dhanlaxmi has sought to transform itself into more than just a traditional bank based in a small town. That hasn’t really worked.
India’s smaller private banks face a dual threat—competition and consolidation. This became a little more real earlier this month, when Parliament amended a law that will allow the central bank to supersede bank boards. The Reserve Bank of India (RBI) had wanted this safeguard before issuing new bank permits.
While that—new bank licences—is still some way away, the smaller private banks know they need to grow to a more respectable size, and even the central bank has said so.
Among these smaller lenders are Dhanlaxmi, Lakshmi Vilas Bank Ltd or LVB (Tamil Nadu), Catholic Syrian Bank Ltd or CSB (Kerala), Ratnakar Bank Ltd (Maharashtra), Tamilnad Mercantile Bank Ltd (Tamil Nadu), Development Credit Bank Ltd or DCB Bank (Maharashtra) and City Union Bank Ltd (Tamil Nadu), each of which have assets less than Rs.40,000 crore, and together account for about 1.4% of the country’s Rs.70 trillion banking sector.
Pressure to merge
These banks, which haven’t been able to improve their long-term performance, will need to induct long-term investors, said K.R. Ramamoorthy, a banker for 40 years and a consultant to the World Bank on the financial sector. “If they are unable to do so, pressure to get merged will mount, especially once investors are given more powers,” he said. “Weak leadership, skill-set related issues and asset quality will force some of the smaller banks to get merged.”
Ramamoorthy is referring to the ceiling on the voting power of investors in private banks being raised to 26% from 10% as part of the amendment to the banking law.
Of the seven lenders, perhaps the greatest challenge is faced by Dhanlaxmi and LVB.
RBI started closely monitoring the Kerala bank last year because of its weak financials and the management’s inability to raise capital. Dhanlaxmi, a potential acquisition target, has until March next year to convince the regulator that it has a healthy future.
The bank is trying its best to do that, said P.G. Jayakumar, managing director (MD) and chief executive officer (CEO), who has the support of the employees union, which has a say in the bank’s running.
He’s clear about one thing, however: “This bank is not for sale.”
And as for financial performance, Dhanlaxmi has been making an effort, he said. “We have cut costs and are focusing on quality growth.”
Analysts and experts don’t agree.
“It is difficult for the bank to recover fast,” said V. Srikarthik, analyst at Espirito Santo Securities India Pvt. Ltd. “Most of the financial indicators suggest that there is a very good chance of the bank getting acquired sooner or later, unless they manage to raise equity capital.”
Dhanlaxmi hasn’t succeeded in attracting investors after scrapping a Rs.290 crore share sale plan in July 2011.
While Dhanlaxmi’s distress is attributed to the wrong strategy, RBI is monitoring Karur-based LVB for alleged irregularities in accounts and corporate governance standards. Instability at the top has added to its woes.
As part of efforts to fix things, LVB hired P.R. Somasundaram as MD and CEO, but he resigned amid alleged differences with the management on corporate governance issues in November. A few months after he left, RBI put two of its general managers on the lender’s board.
Across the state border, CSB has been asked by RBI to reduce the promoter’s stake and list its shares, to ensure that the shareholding is not concentrated in the hands of a single shareholder—Thailand-based businessman Sura Chansrichawla, the single-largest shareholder in CSB, holds around 18%.
Much of the trouble these lenders are in can be traced to their origins as community-based banks. But, at least one expert said, a recovery wasn’t wholly impossible.
“The reasons why things went wrong with some of these banks include their expansion strategies, a cultural disconnect between the main stakeholders and the new management, and associated imbalances in their cost structure,” said Akeel Master, partner (financial services) at consultancy firm KPMG India. “These banks have failed to deliver purely due to their own peculiar reasons. Any bank with a good management and strategy will be able to revive. They need to deliver on the promises they made to stakeholders.”
Both Dhanlaxmi and LVB hired outsiders to try and put themselves on the fast track. Somasundaram was a former Standard Chartered Bank executive who left LVB after a two-year stint. Rajat Baldhi, who’d worked with foreign banks before joining LVB as executive director, also didn’t stay long. Both Somasundaram and Baldhi cited personal reasons for quitting.
Jayakumar’s predecessor at Dhanlaxmi, Amitabh Chaturvedi, was hired from Anil Ambani-led Reliance Group. He was at the helm for about three years, during which expenditure ballooned thanks to a massive recruitment. Income didn’t match expenses, leading to losses.
Some lateral hires may be working out though, such as Murali M. Natrajan, MD and CEO of DCB Bank, who came from Standard Chartered Bank about three-and-a-half years ago.
Likewise, Vishwavir Ahuja, CEO of Kolhapur-based Ratnakar Bank, the country’s smallest commercial bank, who used to be with Bank of America Corp. Ratnakar Bank has also appointed executives from Citibank NA, Axis Bank Ltd and ICICI Bank Ltd as part of its makeover exercise.
While there’s enough manpower, finding those with the right skills isn’t easy, Natrajan of DCB Bank said. “The environment for existing smaller banks is not easy.”
When new banks enter the industry, a prospect that could happen next year, consolidation will be an option for them.
“These banks may look at the network of existing banks to grow bigger,” Natrajan said. “There will be pressure for existing banks as new banks will hire from them and this has a cost implication.”
The central bank doesn’t seem to be too keen on banks that don’t grow to a certain size, especially after having been around for several decades.
“Some five years back, RBI had made it clear to these smaller banks that each of them should scale up significantly if they want to stay relevant in the larger scheme of things. The regulator did not see any purpose in limiting their operations regionally,” said Srikarthik of Espirito Santo. “However, despite bringing in top management from larger banks, most of them could not do that. For example, Dhanlaxmi remains at the same place, where it was four years back. Same is the case with LVB.”
There are no short cuts to building a strong bank, according to Ramamoorthy. “If you bring top management heavily without grooming the middle and senior level, that doesn’t really help,” he said. “In some of these banks, there has been no attempt to build up capacity or groom young talent over a period of time.”
The power of the employee unions at the weaker banks is also a concern, being perceived as averse to change and opposed to takeovers. In Dhanlaxmi, out of about 2,600-odd employees, some 1,900 are unionized. Out of 3,300 LVB employees, 1,200 are registered with unions.
“We must recognize the impact of unions in the running of south-based banks,” Ramamoorthy said. “Sometimes, weak managements try to appease unions by going overboard in terms of wage settlement. Once they succumb to such demands, banks end up with employees with wages of the private sector and the skill set of the public sector.”
Jayakumar of Dhanlaxmi said there really is no other option. “You have to live with them and work out plans for the growth of the entity, joining hands with these unions, instead of trying to eliminate them,” he said.
Every small bank in India, knowing that time may be running out, is trying to turn itself into a viable enterprise.
One of the banks that’s not in the list above is Mangalore-based Karnataka Bank Ltd. Although not quite a small bank, it’s been the subject of much speculation as an acquisition target in the last few years. In the past year, the stock has gained 136.56% against a 22.34% rise in the Sensex and a 48.48% jump in the BSE Bankex.
“I have been answering questions since 2001 on chances of this bank getting merged (with) a larger bank. Unless the bank is weak, there is no threat. We are not here to get acquired,” said Ananthakrishna, non-executive chairman of Karnataka Bank, who goes by one name.
The lender has appointed consultancy KPMG to chalk out a growth strategy. The agency is working on a host of parameters, including improving the quality of assets, the composition of loans and deposits, and skill of employees, said Ananthakrishna. KPMG is expected to submit its report by March.
LVB is implementing an expansion strategy to step up its retail business operations by boosting doorstep banking, opening more sales outlets and reducing its bad loan pile, said K.S.R. Anjaneyulu, interim chief. It is also trying to bring down the promoters’ stake to 10% by 31 December from 11.1%, to make the shareholding more diverse.
Ratnakar Bank, which has just finished building a new technology platform, is consolidating operations in Maharashtra, where most of its branches are located.
Stocks of some of the older listed small banks have been rising on speculation that they may be acquired by bigger rivals seeking to consolidate their position before new lenders enter the industry. But the benefits of such mergers may take a while to percolate through to investors, Ramamoorthy said.
“Managing to achieve a return on assets (RoA) of 1.5-2% and return on equity (RoE) of 15-20% will be a tough job for acquirers,” he said. “It will take at least six to eight years for (buyers) to convert entities they acquire into profitable units.”
New private banks typically have an RoA of 1.5-1.8% and RoE of 14-20%. Only ICICI Bank had a lower RoE, 11.2%, in fiscal 2012.