The consolidation of public-sector banks has not really gathered steam because it has to be a calibrated process, feels Romesh Sobti, managing director and CEO, IndusInd Bank. In an interview with Shamik Paul, Sobti says he wants to rebalance the bank’s loan book as part of its diversification strategy. He sees IndusInd Bank not only as a standalone banking entity but also a conglomerate, and says the lender is very focused on organic growth. Excerpts:
You have been a banker for close to 45 years. What are your guiding principles?
The guiding principles or the basic tenets of good banking remain the same, no matter what one’s age. Good banking practices say first you get the money and then you lend it. That’s how you manage your balance sheet. You don’t lend long and borrow short. Also, banking is about relationship management — managing relationships with individual customers and corporate customers. Good banking is also about honouring your commitments, it is about not making false promises. Then there is the issue of who comes first, employees or customers. I have a principle that happy employees will get happy customers.
What is your vision for your bank?
The landscape of opportunity has changed quite a lot over the years. The Bharat Financial acquisition was driven by the logic that a large swathe of opportunity lies in rural India. Rural banking is the new frontier, and the Bharat Financial acquisition was meant to bridge the gap we had in our business model of being basically urban and semi-urban. We have also learnt a lot about businesses that we call para-banking. For instance, insurance, whether it is life, non-life or health; mutual funds; and to some extent, brokerage, is a business that we do on a third-party basis. We sell products of other parties. Now, there is a thinking that we should do it ourselves. We see IndusInd Bank not only as a standalone banking entity, but a conglomerate. We have learnt how to distribute these products over the last 10 years. Therefore, we feel comfortable getting into them ourselves. Third, we are very focused on organic growth. The bank has grown at a compounded rate of 25-30% on various parameters. Continuing that momentum over the next 3-5 years is of paramount importance. We will continue to grow the branch network. We see a strong linearity between branch network and business growth.
What is your acquisition strategy?
The inorganic strategy is driven by twin objectives. The acquisition must be accretive from day one. And it must give us either a specialisation or domain leadership. We will not acquire assets for just growing our balance sheet. The other question is: where do you do organic play and where, inorganic play. When the business is capital-intensive, or very specialised, or with a longer gestation period, and you prefer the organic route, then we will take the inorganic way. And vice-versa. The way forward is to make up our minds on what we want and then look for opportunities that fit the bill. At this point in time, there is some clarity on the acquisitions we are interested in. In terms of priority, there are insurance and mutual funds. Within insurance, there are three segments: life, non-life and health. We are a strong bancassurance player in all these three segments. So, we will not choose one over the other. It will depend on the opportunity that presents itself. As per regulatory guidelines, these businesses would be subsidiaries of the bank.
What is the size of acquisitions that you are looking at?
We don’t have any particular size in mind, but it has to be of an order that does not shake the bank at its roots. It has to be digestible, and should not distract management attention to the extent that the core business suffers. We won’t bite off more than we can chew. The size will be different for each sector. Life insurance takes much more capital, non-life takes less and mutual funds take even less capital. We haven’t reached the stage where we can go to the board with a specific opportunity. But yes, we have started looking for opportunities.
Do you see a change in your loan portfolio?
In our loan book, 41% is retail, including vehicle finance and non-vehicle retail loans. The other 59% is micro-finance, SME, and large corporates. We have articulated in our three-year plan that we want to get to a 50-50 ratio between retail and corporate loans. Within retail, we want the book to be comprising 50% vehicle finance and 50% non-vehicle loans. Since vehicle is 70% and non-vehicle 30% at present, we want to rebalance our book. That is part of the diversification strategy.
What is your view on the privatisation of public-sector banks?
I think the agenda for all banks has to be the same: good lending practices, deposit mobilisation and management of operating expenses. After nationalisation, there was a specific agenda for the public-sector banks — a lot of developmental work had to be done. And that was achieved to a very large extent. The state-run banks made a huge difference to the development agenda. So, I think it was justified. But after 10-15 years, the commercial agenda should have become a priority again. Instead, the state-run banks persisted with the developmental agenda. Now, that agenda is common to all banks. Everybody has to achieve 40% priority sector lending. So, there is a level-playing field as far as lending to the poor and promoting financial inclusion is concerned. However, the commercial agenda cannot be put aside. You will have to revert to the commercial agenda forcefully, and that can be done with or without privatisation. It is not essential to take the privatisation route for the purpose.
What do you think is the reason behind the problem of NPAs?
It is easy for us to sit outside and conjecture about what happened and what didn’t. But I think it was because of the commercial agenda being put on the back burner. Plus, there is the issue of prudence in banking. I mean, nobody told the banks to lower their credit screens; nobody asked them not to do the basic underwriting, the due diligence. Yes, sometimes the credit was directed. But even with such a direction, as the leader of a bank, you could have stood up, highlighted one’s responsibility towards the bank. People have done that.
The consolidation of public-sector banks has not really gathered steam. What could be the reasons for that?
It has to be a calibrated process. In the first phase, SBI and its subsidiaries got merged. Then came the problem of bad loans. Recapitalisation had to be done. A very strong dose of recapitalisation is being provided now, which means you clean out the books and then the next phase of consolidation can happen. You can’t have two bad banks being merged. We are seeing the second phase of that process.
Will RBI’s recent notification hasten the resolution of bad debt?
None of the earlier processes worked, be it SDR, CDR, or S4A. So, was it a case of kicking the can down the road? If so, this is a better way forward, a stepping stone to the implementation of IND-AS, wherein you will have discipline. Second, the little arbitrage that was happening between the borrowing customers and banks, which means if out of 10 banks, 6 are regular and 4 are NPAs, the 4 declare the asset as NPA and the other 6 do not. This arbitrage is being eliminated. It says unless you repay all banks, you aren’t cured. What would have been done for SMA2 is being done for SMA0. So, it’s a strong process. The first reading certainly makes you believe that this is the way to go.