Mujmbai: At the headquarters of Karnataka Bank Ltd on the banks of the Netravati in Mangalore, the board of directors is preparing for a new reality.
Beginning next week, the lender will start considering pitches from global consulting firms offering strategic advice to the bank—though not to find a buyer, as is often rumoured on Dalal Street.
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Like Karnataka Bank, six other small private sector banks—Development Credit Bank Ltd (DCB), Dhanlaxmi Bank Ltd, Catholic Syrian Bank Ltd (CSB), South Indian Bank Ltd, Ratnakar Bank Ltd and Federal Bank Ltd—are reworking their business strategies to safeguard their positions against new competitors. These banks are preparing for an era of intensified competition after the Reserve Bank of India (RBI) permits new banks backed by deep-pocketed business groups to open for business.
“We are here to stay,” said Ananthakrishna, non-executive chairman of Karnataka Bank. “I do not know why people always ask us about the bank being acquired. They (large banks) may have bigger names but a sell-off is not what we want to do.”
The bank is in talks with consulting firms such as McKinsey and Co., KPMG and Deloitte Touche Tohmatsu India Pvt. Ltd to prepare a new business strategy. Elements of this will include improving the quality of assets, increasing the share of retail and mid-corporate loans, mopping up a higher proportion of cheaper deposits, and bringing in skilled staff, Ananthakrishna said.
“These consultants will guide us with a holistic approach to deal with the issues and see how to take things further,” he added.
One of the first steps many of the smaller banks have taken is to get in talent from bigger financial groups.
For instance, Kolhapur-based Ratnakar Bank, the smallest in India with only Rs 3,200 crore in assets, now has a totally new management team, led by managing director and chief executive officer Vishwavir Ahuja, a former Bank of America Corp. executive, and several others from banks such as Citibank NA, Axis Bank Ltd and ICICI Bank Ltd.
Former Standard Chartered Plc. executive Shyam Srinivasan joined Federal Bank as managing director and chief executive in September, while Amitabh Chaturvedi came to Dhanlaxmi Bank from the Anil Ambani-controlled Reliance Group.
According to Ahuja, Ratnakar Bank is currently building up a new technology platform and has begun to consolidate its operations in Maharashtra, where it has most of its branches.
“Wherever we are present, we want to consolidate there by deepening our presence, by building a cluster-based approach, which may mean we may add more branches, even where we are well represented,” Ahuja said.
Chaturvedi, under whom Dhanlaxmi’s business has quadrupled from Rs 5,710 crore in March 2008 to Rs 21,595 crore in March 2011, says he is not overly concerned about more competition.
“You have to revisit your strategy at regular intervals. It is an ongoing process,” he said.
Murali M. Natrajan, managing director and chief executive officer at DCB, said his plan is to focus on small and medium enterprises.
“Right now our lending mix is 25% retail, 25% SME and 25% corporate, but going forward we want to increase the SME share to 50% because that’s where our branches, underwriting capabilities and business is strong. We know that business,” Natrajan, who was previously with Standard Chartered, said.
After trying to offer everything that their larger peers could offer, these banks are now turning their focus on their strengths.
V.A. Joseph, managing director and chief executive officer at South Indian Bank, said the lender did not see any major threat to its existence given the “immense” scope provided by a large unbanked population in the country.
“We’ve survived competition for the last many years and are confident and we’ll continue to do so,” he said. “There is enough business (for existing players) there to get even with new banks coming in,” Joseph said.
The lender is looking at doubling its balance sheet from Rs 52,000 crore at the end of March 2011 to Rs 1 trillion by March 2014. The bank, which has targeted to gain presence in every state in the next three years from 26 states now, has doubled its business every three years since 2008, from just Rs 13,000 crore in 2005 to Rs 52,000 crore in 2011, Joseph said.
Many small private sector banks have strong regional and community roots, which has been a traditional strength but has sometimes led them to get boxed into a small area or set of customers.
“Most of the south-based lenders are driven by communities and hence could not expand,” Vaibhav Agrawal, vice-president, research, Angel Broking Ltd, said.
“These banks are built around communities and have been doing business with customers from generation to generation. They have certain core competencies like retail and small and medium enterprises. Probably that is what they are comfortable doing.” he said.
For instance, Kerala-based CSB is generally perceived as a bank favoured by the local Christian community.
In an interview with Mint earlier this month, Ahuja had admitted that Ratnakar Bank’s earlier management perhaps lacked the vision and ambition to become a large bank.
“In any case, I would say they were quite prudent on the one side—frugal, simple and content with running a clean, profitable bank that serves its customers well with happy and committed employees and reasonably satisfied shareholders,” he added.
Management laxity has been a worry in the case of Bank of Rajasthan, which was acquired by ICICI Bank in August in a no-cash deal, amid allegations that the management did not follow regulatory norms, prompting RBI to take control of its management and subsequently push for a merger.
Two other mergers in the last decade have also involved banks that could not stand on their own feet, such as IDBI Bank Ltd acquiring United Western Bank in 2006 after a moratorium, and HDFC Bank Ltd acquiring Centurion Bank of Punjab in 2008.
Experts warn that small lenders are still “relatively susceptible” for acquisitions if they fail to bring in adequate capital, improve quality of service and strike collaborations with other players to widen the bouquet of products to clients.
“The critical challenge will be to sort out the issue of raising capital to fund their growth plans besides focusing on quality service. Striking tie-ups will also be crucial,” Monish Shah, director, Deloitte India said.
According to Shah, a good strategy for these lenders will be to focus on their niche markets and consolidate their operations in their strongholds.
“Each of them have strengths in certain sectors or geographies. Given their constraints, instead of reaching out to newer markets, they should ideally strengthen the existing business,” Shah said.
The total assets of seven smaller banks constituted around Rs 1.46 trillion as on end of March, just 8% of the Rs 12.20 trillion assets with India’s largest lender, State Bank of India (SBI).
Despite the denials by the managements of small banks, acquisition rumours refuse to die down.
On 7 June, for example, the shares of Karnataka Bank surged to their highest level in more than four months spurred by rumours linking the bank to Axis Bank and Kotak Mahindra Bank Ltd.
Besides Karnataka Bank, banks such as Dhanlaxmi, DCB and Lakshmi Vilas Bank Ltd have also been riddled with acquisition rumours. For instance, CSB was in the news as a possible buyout target for Federal Bank.
CSB is another bank now in the process of appointing a consultant shortly to rework the business plan, said S. Santhanakrishnan, non-executive chairman of the Thrissur-based bank.
“Whoever comes, we will have our own strategy. We are in the processes of bring in a consultant, who will look at the existing strategy, how the bank can be different from other banks, customer preference, identifying a new technology and re-engineer the business model,” he said.
According to him, the unlisted bank now has around Rs 15,000 crore in assets and relatively higher bad loans compared with most Indian banks, with gross non-performing assets at 2.5%. CSB is on course to strengthen its client acquisition strategies “to provide an account to each family in Kerala”, Santhanakrishnan said.
Consolidation in the banking sector has been on RBI’s agenda for quite some time, but no major deal has happened in the sector except the merger of SBI’s associates with itself and a few acquisitions among private sector banks.
DCB’s Natrajan said existing banks face three new challenges with the likely advent of new banks, namely in terms of talent, capital and customers.
“When the new banks come they will hire people from existing banks like us particular people in the frontline. Second is the challenge to retain customers because execution in banking is easier and any new product can be replicated in six to nine months after launch, so there is no differentiation in service or products,” he said, adding that capital raising is going to be a major challenge for smaller banks, which need to go to the market every now and then.
Both Joseph and Natrajan, however, are not worried about possible takeover threats. While Natrajan said that DCB promoters are not willing to sell, Joseph points out that historically it’s only the weak banks that have become targets for takeovers.
Also, it is important for smaller banks to have a proper succession planning and identify people for positions early, Joesph said. “There (is) need to have proper succession planning and identify people to fill positions. Customers are not concerned about the bank name, they are only concerned about the service given by bank. So a bank has to be quick in decision making and provision of service.”
“Banks which are doing well have never been acquired, so we are not concerned. Also, a merger is not always the solution for a bank’s problems,” Joseph said, adding that the bank is confident of continuing to double its balance sheet, and expects to increase branches to 700 in March 2012 and 800 by March 2014, from 643 now.