India will probably begin merging its 27 public sector banks by next year, with Bank of Baroda among the likely consolidators, its executive chairman Ravi Venkatesan said on Thursday.
Speaking to FinanceAsia at Credit Suisse’s 19th annual Asian Investment Conference in Hong Kong, the former chief executive officer of Microsoft India predicted that the Indian government would look to strengthen the struggling institutions by melding them into larger entities.
“The government has come to the conclusion you can’t have 27 public sector banks,” he said. "The point of view is emerging that consolidation is inevitable and necessary.”
Venkatesan said this is because there are simply too many poorly managed banks in India for the government to revitalise. The capital cost alone would be huge.
New Delhi has said that it will invest $10 billion over four years to support public sector banks but Venkatesan said that much more will probably be required, citing Credit Suisse estimates that they will need up to $45 billion by 2019. “I think that figure is much closer to the mark,” he said.
Venkatesan added that the government would be unlikely to seek to inject new capital into unreformed lenders. “There’s no point in handing new capital to badly managed banks; it will just be a waste of capital,” he said.
Bank of Baroda is likely to be at the forefront of the expected change given that the Indian government of Narendra Modi only installed Venkatesan as chairman and PS Jaykumar as CEO in October with an explicit mandate to turn the bank around. In effect, Bank of Baroda is a test case for public sector bank reform.
“The government asked me to come and do an experiment to fix the Bank of Baroda,” Venkatesan said. “It’s an experiment that we cannot afford to fail.”
Venkatesan was the head of Microsoft India for eight years before being approached for his new role. “I was brought on board to both manage the board and to help instal governance procedures into the bank,” he said.
Owning up
India’s public lenders have long struggled due to a combination of poor lending practices and weak insolvency proceedings, but also because governments at all levels often regarded the banks as easy sources of funding for favoured projects or companies.
“We’ve often been referred to as piggy banks or ATMs [for politicians],” Venkatesan said.
This has led to a surge in non-performing loans even as these banks have lost market share to their nimbler, more aggressive private sector rivals.
“The public sector banks constitute 75% of the overall bank market [in terms of assets] but the private sector banks make 50% of the profits,” Venkatesan said. “And their market share is growing. They accounted for 50% of new loans so far this year.”
Rating agency Crisil, which is affiliated to Standard & Poor’s, estimated in early March that weak assets held by public sector banks would rise to hit 11.3% of their total loans by the end of March, 2017. It also predicted that many of the lenders will report losses for the financial year just concluded to March-end and over the next 12 months as well.
Under its new leadership, Bank of Baroda has come as clean as possible about its bad loan exposure. It reported a whopping Rp33.4 billion ($496.19 million) loss for the final quarter of 2015, the largest quarterly loss ever reported by an Indian bank. The drop was due to gross non-performing assets rising 64.2% from the previous quarter to Rp389.3 billion, or 9.68% of total assets.
Venkatesan admitted that the result for the last financial quarter of the 2015/2016 fiscal year were likely to be pretty unpleasant too.
Litmus test
Bank of Baroda is the nation’s second-largest public sector bank after State Bank of India. Venkatesan said the lender was chosen by the government as a litmus test of reform because it had better general metrics and clients than most its public sector peers, plus a 5,330 domestic branch network that is largely focused upon more economically vibrant areas of the country.
Turning the bank around will take a combination of wholesale retraining of internal managers, implementing more rigorous governance standards in hand with support from better information technology, plus far more centralisation and improvement of loan approvals and risk management.
“We can use technology to create big data and analytics,” Venkatesan said. “It can highlight risk fraud and patterns. Our CEO is obsessed with it.”
Of course, turning the bank around also needs politicians to recognise the importance of leaving the lenders alone, but this is something Venkatesan says the new government most definitely does.
The bank is conducting a top-to-bottom review of its strategy, considering what business areas or clients fail to yield enough returns, and which profitable areas it could improve its exposure to. He points to trade finance – “low risk but low return” as one example of the former.
In addition, the bank is looking to sell non-core assets, such as its 18.5% stake in UTI Mutual Fund, India’s oldest mutual fund, and recalibrating its overseas branch network of 106 offices, potentially pulling back from some countries or regions and expanding others.
“Why do we need a branch in Nassau [the capital of the Bahamas]?” he said. “Instead, maybe we should double down on London or Dubai.”
Bankruptcy hopes
One way Venkatesan believes the government can also raise capital for the banks is to sell further shares in them. “We are currently 57%-owned by the government and it could reduce this to 52%, which is the current legal minimum, after our share price begins to recover,” he said.
With a change in the law, New Delhi could even cut its stake to a minority, while remaining the largest overall owner. Venkatesan said it could do this by issuing non-voting shares, for example.
In addition to bank consolidation and recapitalisation, Venkatesan also looks forward to the Indian parliament finally passing a comprehensive bankruptcy law, to make it easier to force companies into insolvency and restructure their debt.
He would also like to see a professional debt management agency. “It’s not a core competence of the bank and takes a long time, and then you have joint lending consortia as well, and if you negotiate a settlement then there is the spectre of money having changed hands,” he said. “It’s better for state agency to deal with it.”
But ultimately Venkatesan said he has one key goal: improving Bank of Baroda’s people. “I’ve worked in a lot of different businesses but the one constant between them all has been people.”
To raise the talent at Bank of Baroda the management has chosen 500 assistant general managers, the sort of people likely to become the next leaders, and is putting them through 18 months of intensive training, which includes mentoring, training, and assessments such as making them conduct and execute tough projects.
“We’re putting them through intensive personal development. They are the heart of this transformation,” Venkatesan said.
