Mumbai: Public sector lender IDBI Bank Ltd has set its eyes on another bank, and its chairman and managing director Yogesh Agarwalis confident of completing an acquisition by the fiscal year beginning April. The project finance institution-turned-bank is recasting its business model following the recommendation of consultancy firm McKinsey and Co., according to which the bank should look for inorganic growth, besides expanding its existing businesses.
Agarwal, who has overseen the integration process of three entities that created IDBI Bank—Industrial Development Bank of India (IDBI), IDBI Bank Ltd and United Western Bank Ltd (UWB)—seems to be a firm believer in the growth through acquisition theory.
New take: IDBI Bank’s Agarwal says he has inherited a situation that no banker in India has ever faced. Ashesh Shah / Mint
In an interview, Agarwal talks about restructuring business, taming trade unions, paucity of talent and the mammoth task of integrating three different organizations. Edited excerpts:
Are you repositioning IDBI?
It’s not proper to call it a repositioning as we didn’t have a position. So, it’s basically positioning. When I came over here about one-and-a-half years back, we had three banks merged together—IDBI, IDBI Bank and United Western Bank of Satara. They were three vastly different entities—a term-lending institution, an efficient new private bank and a failed old private bank.
All three units had their own branches and systems. There were three strategic business units, but no integration. We needed third-party assistance in integrating the organization. So, we called McKinsey.
First, we wanted all branches on the same technology platform. The second thing we did was to have common terms and conditions for all the staff. We brought in a consultant, Cerebrus Consultants, for the HR (human resource) exercise.
What’s the mandate given to McKinsey?
We are the eighth largest bank in the country and want to be the fifth largest bank by 2012. In order to become the fifth largest bank, we must have a balance sheet size of Rs5 trillion.
Our current balance sheet is around Rs1 trillion. So, we must have a vastly higher growth rate than that of a traditional public sector bank.
How do we achieve this? We decided that part of this will be organic and part inorganic.
One advantage of going through the merger process is that we all know what it takes to do a merger. I think we are the only public sector organization which has the experience of merging private sector into public sector.
This time around, will you look for a public sector bank?
When we talk about consolidation, we largely talk about consolidation within the public sector banks. But it’s not likely to happen. Because the government’s ability to push (consolidation) is limited. So, I said the only way to consolidate public sector banks like us is to look at private sector players—smaller ones—and merge it.
Having merged two organizations, we know what pitfalls to avoid.
You have set your eyes on an old private sector bank?
Have you appointed any merchant banker?
We have not reached that stage yet.
What’s your new business model?
We dispensed with the administrative system of branches. The three entities were virtually working as silos. A customer would be approached by a team from IDBI and another team from IDBI Bank and they would compete with each other for the same business. About 80% of our customers were common between the three different groups.
We restructured our entire organization around six business verticals, each focusing on different customer segments. We divided the bank into two—corporate and retail sides.
On the corporate side, there are three verticals—infrastructure, large corporate group and the mid-corporate group. We have also created three verticals for the retail business—small and medium enterprises, agriculture and personal banking.
Is this unique in the public sector?
To the best of my knowledge, this structure of verticals has not been attempted by any other public sector bank.
What about employees and branches?
We were also terribly short of staff. We went on a massive recruitment drive. We have at the moment about 7,000 people. And going on to 9,000 in a couple of months. It was about 5,000-odd when I took over.
After the UWB merger, we had about 450 branches. By this year, we will have 750 branches.
Is it paying off?
In the housing loan segment, we have the third largest disbursement after State Bank of Indiaand HDFC (Housing Development Finance Corp. Ltd).
Our business growth has been the highest among all banks. We are gaining market share rapidly in the retail segment. For the first time in the past 10 years, we have got a positive net interest margin. Our fee income has almost doubled.
You seem to be importing talent from State Bank of India, where you were a managing director before this assignment.
IDBI Bank was a private sector entity and had private sector compensation packages. My predecessor made an announcement that after three years of merger, the compensation level will be that of IDBI. As a result, out of about 2,500 staff of IDBI Bank, 1,800 left. In fact, all senior executives left.
The term-lending institution had excellent staff, but they had their area of expertise and were not familiar with retail business. So, we went on a massive recruitment drive.
But where do I get the leaders from? We needed people from the market for some pivotal positions such as treasury, retail, capital markets business, etc.
We consulted headhunters and the uniform feedback that I got was that private sector guys don’t want to come. A private sector fellow thinks that if he gets a public sector tag, his market value will go down. So, I had to look for people in the public sector. Now, if I have to recruit from the public sector, which bank is better than State Bank?
You are also breaking away from the industry wage negotiation brokered by the Indian Banks’ Association (IBA)?
Absolutely. I have some advantages. My staff cost is the lowest in the industry. None of the three entities was part of IBA wage negotiation process. Although I am a member of IBA, I told them we don’t want to be a part of wage negotiation because for one basic reason, if we go by that, we will not be able to attract talent and retain them.
You are handling trade unions with an iron hand.
I have inherited a situation that no banker in the country, public or private sector bank, has ever faced. I told the unions of three entities to merge, but for some reasons that never happened. I told them we are all fighting for survival and if the organization doesn’t survive, none of us will survive.
In Chennai, the union guys wanted their salary in cash, but that’s not possible. Their leader one day switched off the lights and the water pumps in the branch. We suspended them—three electricians and the leader.
When we are fighting for survival and trying to improve the bank’s image, what kind of impression a customer would get when he walks into a branch and sees all dark? Are the unions working for the organization or against the organization? You call this an iron hand. I call this survival of the organization.