ICICI Bank is calling off the frenzy of expansion to hunker down to the basics of safe banking
ICICI Bank is calling off the frenzy of expansion to hunker down to the basics of safe banking
There’s something about ICICI Bank that evokes strong emotions. And there’s something about its CEO, Chanda Kochhar, 47, that makes one pause for a moment’s thought. Kochhar was billed recently by Forbes magazine as the world’s 20th most powerful woman, above Hillary Clinton. It’s hard to assess the objectivity of this list, but Kochhar is certainly the most powerful woman in Indian business. The bank’s corporate clients know it. Retail customers are only beginning to sense what she has been up to lately.
Those who developed a gnawing dislike of the bank for its pushy executives and call centre agents who would call at unearthly hours—even lampooned in the odd Hindi film—for example, would have noticed a sudden silence. The interruptive calls are all but gone. Those who love the ease of transaction that ICICI Bank’s internet banking facility offers, though, may have noticed nothing. It’s business as usual.
But of course it isn’t. Kochhar, who took charge in May this year, wants a swift course correction. ICICI Bank, that exemplar of breakneck growth, has decided to call off the frenzy of expansion and hunker down to the basics of safe banking. Loose lending is out, the rulebook is in. It’s a message that has reached far and wide, down to the last cubicle of the bank’s offices. If there are waivers in her scheme of things, it’s not to do with the loan book—like the exemption she has granted herself from the corporate policy of using the bank’s signature advertising jingle as a phone ringtone/caller-tune; she has the Gayatri Mantra. It’s what she recites on her way to work, too. It’s the only time she gets for religious practice, she says.
It’s a huge bank. And thanks to its size, wide spectrum of services, and unmissable presence in urban India, it would be rare to find a person who hasn’t had a brush with the bank. Usually, it is consumer goods companies and telecom firms that witness such a high degree of customer engagement. For years, most of its products—from bank accounts to home loans to personal loans to insurance policies to credit cards—were sold like they were soap or toothpaste. Growth was the mantra at ICICI Bank. Market expansion, size and scale mattered the most. Return on investment could wait.
“My focus has been to reorient the strategy to the current economic environment,” elaborates Kochhar, “Every strategy is relevant to the given economic environment. In the past when the country’s GDP was growing at 9 per cent and the whole retail banking and financial services industry was so nascent and underpenetrated, we took an opportunity to grow our business substantially. In the current scenario, where the risk profiles of customers have changed, it’s important for us to reorient our strategy. In this year particularly, when credit growth is not as high as it has been in the past, we are reorienting some parts of our balance sheet to keep us better prepared for the next phase of growth.”
In other words, Kochhar wants ICICI Bank to become what banks used to be in the good old days: sedate, with balanced growth for sustainable and higher income. The mass withdrawal of deposits last year, in the wake of rumours that the bank might actually fold up, was so painful for the bank that commanding the kind of respect its biggest private sector rival, HDFC Bank, does became a priority.
To a large extent, banking is a business of commanding confidence. Kochhar herself got the top job only after a stiff selection process that, GE like, saw other contenders leave after she was appointed. The bank’s executive director and head of human resources, K Ramkumar, says that Kochhar was appointed for three leadership attributes. “She has an extremely strong emotional balance,” he says, “During the withdrawal crisis last year, all of us were working 20 hours a day. Even when she went from one TV camera to the other reassuring investors, never did she lose control of the situation. Secondly, her ability to simplify strategy is remarkable. She doesn’t throw jargon. No professorial management lectures. Everything is simple and straightforward like a homemade remedy. Kochhar is one of the most hands-on leaders I’ve come across. Her grasp of what makes successful execution is great.”
Kochhar recalls the near run on the bank last year: “We had to address the concerns of shareholders, customers and almost all stakeholders in a matter of a few days,” she recounts, “In the short period of two weeks or so, many people had unanswered questions in their minds, and they did withdraw some of their deposits from our bank. Today, all those challenges are behind us. Our monthly increase in savings deposits and current accounts is much higher than that of the previous July. So whether it’s in terms of adding new deposits or customers, we are back to pre-September 2008 days.”
According to Ramkumar, the company felt a bit like Sourav Ganguly when he was dropped from the team. “But it built character in all of us,” he adds, “If we could manage that crisis, we knew we could manage anything.”
In functional terms, banking is about assets, which for banks are loans which generate money since they are to be paid back with interest. ICICI Bank’s recent woes stem from the amount of unsecured loans (personal loans and credit card lending without any collateral) it had given out when the times were good. Although banks charge much higher interest rates for unsecured loans (usually 20 per cent and above), the risk of people not paying back is also far greater. Moreover, unlike home or car loans, the money is not lent against any physical asset that could be repossessed. Ergo, ICICI Bank’s gross non-performing assets (NPAs), or the part not being paid back, is the highest in the country at 4.6 per cent of its total lending. State-owned SBI’s good-loans-gone-bad are under 3 per cent, while HDFC Bank has an enviable figure of 2.1 per cent.
In a clear departure from the past, ICICI Bank is keeping a tight leash on unsecured lending. Personal loans would be almost impossible, and you can get a credit card only if you have a two-year-old relationship with the bank. At the end of the last fiscal, it still had a thick book of accounts, with outstanding retail loans of Rs 106,200 crore, of which 15 per cent were unsecured. Although by June the figure had come down to Rs 96,000 crore, the risky ratio was still the same.
Squeezed by a cash crunch, borrowers often shift priorities on which loans to keep going and which equated monthly instalments (EMIs) to quit paying. Unsecured loans are typically the ones left dangling. “Also, in the last two-three years, the way the entire soft environment has moved vis-à-vis banks’ collection efforts, has made customers feel that the bank cannot do much if unsecured loans are not paid. The willingness of customers to pay back these loans has changed because they know that they would have the media and judiciary’s support,” contends Kochhar.
Bank executives don’t deny their earlier errors. “Clearly, our loan book was not mature enough and we got some assumptions horribly wrong. To dole out a large number of credit cards and personal loans to people, without fully understanding their cashflows, was pretty naïve. No economic model lasts 30 years, but we made the assumption that 30-40 per cent credit growth would,” admits Ramkumar. In its heyday, the bank was issuing almost 200,000 credit cards a month. Now, it’s down to a little more than 1,000.
Many critics feel that ICICI Bank has developed a cogent business strategy only now, having been forced to lighten its books. “In the past, ICICI Bank seemed to be riding the growth elephant. Their only strategy was to go out and sell any product to whoever was interested. It can work when times are good, but never did we feel that ICICI Bank had a plan B. Now, the signs of fiscal prudence are very encouraging,” says a senior analyst at the brokerage firm Citi Smith Barney.
There are also those who think ICICI Bank made the best of an opportunity—under Kamath—to emerge as a big player in Indian banking while the sector remains relatively insulated from global competition. Under new circumstances, analysts approve of the Kochhar plan of action. “The bank is decisively executing a credible strategy of consolidation that should result in an improved deposit and loan mix, and consequently in improved performance metrics,” says Vaibhav Agarwal of Angel Broking.
How would it affect the bank’s brand image? One of Kochhar’s challenges is to change the way the bank is perceived by people. Numerous stories of the bank’s collection agents harassing customers to recover dues had done its customer franchise no good. Although the bank still denies allegations of strong-arm tactics, it admits that these agents weren’t the best brand ambassadors for the bank. Their services have been done away with. “The whole approach towards collection must be preventive rather than curative,” says the CEO, “Which is what has made us say that we will do it in-house. Our own people who sell loans will follow up on payments, rather than rely on agents.”
The September shock last year has also made ICICI Bank wary of wholesale funding. To access low-cost funds, the bank now wants a diversified base of stable depositors. This means more small savings, on which only 3.5 per cent interest is paid—and of course current accounts, on which no interest is paid. This is a good way to turn the operations more profitable, says NS Kannan, chief financial officer of the bank.
The other way to achieve that result is to crush costs, and that is also being done with due fury. Operating costs, specifically, are being pushed down with a purple passion. “The idea is not to cut cost, but to cut waste,” says Kochhar, “When an organisation grows at a rate of 35-40 per cent, you have a tendency to build up a lot of fat on the sidelines. One, because when you are in a growth frenzy, you have less time to look at productivity. There is no productive expenditure that is being cut.”
The bank’s suppliers have already had shivers running down their spines. “You don’t realise that over the past four years, the amount of business that you were giving your vendors would have gone up four times. And you have not, to the corresponding extent, renegotiated rates keeping in mind the economies of scale they are deriving,” says Kochhar.
Efficiency would also demand a new way of working—the ‘distribution architecture’. Instead of five sales people ringing you at five different hours of the day with five different products to push, you will have just one. This will also make the bank more customer friendly.
And the calls will be gentle—not intrusive. It’s the change in approach. “We used to be like the Ghaznavid army, aggressively snatching market share from others, bringing in a whole new set of consumers,” says a company executive, “Now, the bank wants us to become soldiers of Emperor Ashoka’s army who’d go out and spread the gospel. The morale among middle managers is not too high, given the fact that there have been no bonuses or increments.”
Concludes Kochhar, “Growth need not be aggressive and growth need not always mean balance sheet growth. This year we are setting up 580 more branches, which is a 30 per cent increase. You may call it lack of aggression, but I’ll call it fitting the strategy to the economic environment.” It’s emotional balance at work.