Narayanan Vaghul, one of the Padma Bhushan awardees this year, has been in the banking industry for more than 50 years. He stepped down as chairman of the ICICI Bank last year. Vaghul has been a part of the various changes Indian banking has gone through, has been a catalyst for some changes, and has brought about many changes himself.
He started his career with the State Bank in 1957. ?Banking industry was then like a plane parked on the tarmac. The banking system was sound. But financial markets did not exist. Nothing moved. Nobody bothered about growth. Then came public sector banking. The industry started flying, but it soon hit air pockets. After the banking sector reforms of the nineties, there was still turbulence. Our financial systems were unstable and complex. But the recent events, the manner in which we have weathered the downturn in 2008, means that we have finally taken off and are cruising along at 30,000 feet,? he says.
When Vaghul entered banking, the Imperial Bank had just been taken over and had become the State Bank of India. He was one of those idealistic young people who came under the spell of Jawaharlal Nehru and believed in the new socialistic pattern of society. One of the main purposes of nationalising the Imperial Bank was branch expansion. The SBI wanted to establish 500 branches in five years!
Those were heady days for SBI. It was the time when new ideas were encouraged in the bank. Quite a few things were happening in the banking industry?14 banks had just been nationalised in 1969 and the dust had not yet settled. Aggressive branch expansion was encouraged, particularly in rural, unbanked areas. Small-scale units, that were struggling to borrow, suddenly became the most favoured corporate borrowers.
Vaghul warmed up to the new culture. He was all in favour of bank nationalisation. ?It was the right decision that might have been made for the wrong reasons.? As he recalls, the private sector banks existed then purely for the benefit of business houses. They were divorced from 90% of the people of the country. The concept of rural banking did not exist. There were co-operative banks, which were completely politicised.
However, Vaghul was getting disillusioned with the way the nationalised banks were being managed. He remembers attending a meeting called by the then RBI governor LK Jha after the nationalisation. Jha told the chairmen of newly nationalised banks that nothing would change. Government as a shareholder would not interfere with the administration of the banks. Some policy guidelines would be laid down that the banks would have to follow. This was not the way things happened.
In 1981, while most of his peers were still deputy general managers, Vaghul was appointed chairman and managing director of Bank of India; at just 44, he was the youngest chairman in the bank?s history. That was also the era of loan melas and such populist excesses. He remembers telling the then finance minister that while he was totally behind lending to weaker sections of the society and to small-scale industries, he would rather the professionals did it than the politicians. ?Hold us accountable, but don?t tell us what to do,? he said. But banking for political ends was irresistible. His words were not taken seriously.
Vaghul was given a three-year term with BoI. But, towards the end of his tenure, he wrote to the then governor of RBI, Manmohan Singh, that he did not want to be considered for another term. Why did he choose to quit when he had a decade and half of chairmanship ahead? ?Between 1981 and 1984, the health of the banking industry was deteriorating. Neither RBI nor the government had any idea at all about how to improve things. I felt stifled. I didn?t want to be a mere spectator watching the decay that was setting in. I was unable to stem the rot.? Vaghul?s admirers say his thinking is always innovative and two steps ahead of others. He could see technology emerging as a major factor in banking. But the unions were strongly resistant. They did not even allow the word ?computerisation? to be used. They preferred mechanisation. Singh asked Vaghul to stay on and fight. But Vaghul declined.
Suresh Nadkami, the then chairman of ICICI, then a project finance institution, persuaded Vaghul to succeed him. ?I accepted readily,? smiles Vaghul. ?Must have been a fit of madness.? He admits that the Rajiv Gandhi era inspired him and filled him with hope. Vaghul took over as the chairman and managing director of ICICI in 1985. During the years of his chairmanship, the institution saw spectacular growth, diversified into different directions, had successful public issues, and above all, came to be regarded as one of the better run, better managed financial institutions.
Then came the third phase in Vaghul?s banking career, the financial sector reforms of the nineties. Even before the reforms, the enormous risks associated with developmental banking became apparent to Vaghul. ?The type of project financing we were doing, we saw three out of ten ventures surviving, three limping along and four failing. It was a venture capital (VC) like funding, but not like actual VC where the successful companies give multiples and pay for the failures. There was no process to share the success of companies.
Equity was not large enough and market was not deep enough.? As Vaghul foresaw, developmental banking ultimately collapsed.
By 1996, Vaghul wanted to bring in new blood. He says the environment was changing dramatically and technology was taking quantum leaps. It was time to dismantle the old and recreate a new institution, which needed a younger person. He met KV Kamath in Singapore and offered him the job. Kamath, who had had an earlier stint with ICICI before he moved to ADB, accepted the offer. He joined full time in 1996 and helped make ICICI into a dynamic top-ranking full-service bank.
And Vaghul has seen it all, this entire transformation of the banking industry.