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IndusInd’s Grim Battle

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The banking industry raised a collective eyebrow last December when Ramesh Sobti —India’s longest serving chief of a foreign bank —took charge of the Hinduja family-controlled IndusInd Bank in Mumbai. IndusInd, started by the Hindujas in April 1994, did require shock treatment but what did Sobti see in the near-defunct bank to chuck a decade-old career at ABN Amro? Apparently, it was the challenge of resuscitating a brand given up for dead. “We want to get rid of the atrophy that has set in,” he says. “The aim is to be among the top three private banks in three years.”
Sobti started out by signing up five key bankers from his erstwhile employer, including Paul Abraham, now chief operating officer at IndusInd. On 7 July, five more trooped in. Never before have so many senior bankers left a foreign bank to attempt a turnaround story in a laggard private bank. Obviously, Sobti — who was a key mover behind the Tata-Corus deal in October 2006 — sold his vision skillfully.
Besides, in March this year, IndusInd Bank raised $51.73 million (Rs 222 crore) through an issue of global depository receipts (GDR), its second after raising $34 million (Rs 146 crore) in March 2007. “With this, we will ensure the growth of our balance sheet,” says Sobti.
The targeted annual growth rate of 35-40 per cent is faster than the 25-30 per cent growth rate of some of its peers, but is hardly exceptional considering its small asset base. (Total advances for 2007-08 stood at Rs 12,795.74 crore as against Rs 11,084.20 crore recorded in the previous year.) While this rate will give the bank a balance-sheet footing of Rs 65,000 crore in three years, that’s still puny compared to leader State Bank of India’s current balance sheet of Rs 6,38,164 crore and second placed ICICI Bank’s Rs 3,56,899 crore. Remember, these balance sheets, too, are growing at 25-30 per cent. IndusInd has a long way to go.


Changing Topography
The way IndusInd hopes to get there is a Herculean task by itself. “Sixty per cent of our book is made of finance for two-wheelers, three-wheelers and construction equipment,” says Abraham. “The rest is corporate loans. Home-loans are on a selective basis.” Over time, Sobti’s team intends to add consumer finance to this mix. An analyst at a Mumbai-based brokerage firm says that he does not see a great uptick in the bank’s auto-loan business, but feels that it can ride well on corporate loans given the relationships that the new team has with India Inc.
For success, however, IndusInd has to overcome the slowdown in the Indian economy. In May, industrial output growth slowed to a six-year low of 3.8 per cent year-on-year (YoY) from 6.2 per cent in April, led by manufacturing. Capital goods output growth, a leading indicator of investment activity, slowed sharply to 2.5 per cent YoY (11.4 per cent in April). “This suggests that the rising cost of obtaining finance, input cost pressures, and a negative outlook for sales are hurting investment demand,” says Sonal Varma, economist at Lehman Brothers.

The banking industry itself is in for tough times. With interest rates moving up, depositors are shifting to fixed deposits. “It will be hard for banks to raise cheap current and savings bank deposits as they offer lower interest rates,” says Viren Mehta, partner for financial services at Ernst & Young. A recent banking sector update by brokerage firm Sharekhan says that “asset quality concerns are on rise with the recent hike in interest rates; and the ongoing monetary tightening effected by the RBI threatens to trigger a rise in delinquencies”. So, not only will margins be under pressure, but banks will also have to be careful in their lending.
Plans are afoot to increase the distribution of mutual funds and insurance. The group has also announced its intention to pick up a majority stake in Networth Stock Broking, a Mumbai-based listed stock broking company, through another group entity, Switzerland-based Amas Bank. The key to this business is distribution and IndusInd has 180 branches of its own while Alfin, its subsidiary, has 600-plus outlets, so it has a readymade infrastructure for distribution. But it is up against stiff competition from much larger brokerages such as Motilal Oswal, Angel and Anagram that are entrenched players, as well as banks such as HDFC Bank, ICICI Bank and Kotak Bank that own securities businesses.

New Challenge: Romesh
Sobti left a decade-old
career at ABN Amro
to resuscitate IndusInd

Speed thrills, But...
IndusInd Bank grew at a rapid pace in its early years. But as India Inc. was caught in a vicious cycle of high interest rates and recession in the years that followed, the bank got weighed down by dud loans. Bhaskar Ghose, the former managing director at the bank, says, “In those days, growth was more of a priority than the quality of assets we were booking.” While the reported non-performing assets (NPA) as a percentage of advances came down to 2.7 per cent in 2003-04 from 7.2 per cent in 1998-99, the actual NPAs on the books were so much that they could have wiped out half the bank’s net worth.
IndusInd’s woes worsened after the Chennai-based Ashok Leyland Finance (ALF), a leasing finance and hire purchase company, was merged into it in June 2004. ALF relied on term-loans and securitisation — a process by which assets are sold to investors to create liquidity. At the time of the merger, ALF had Rs 450 crore worth of securitised assets in its books. However, the RBI’s revised guidelines on securitisation in September 2005 brought trouble: income from securitisation had to be booked over the life of the asset (it could not be taken upfront), and worse, the cash collateral kept aside for payment to investors in securitised assets required 100 per cent provisioning for capital adequacy norms. Consequently, IndusInd had to cut back on the securitisation market and resort to wholesale deposits.
The merger was also supposed to improve margins by providing access to the vehicle financing portfolio of ALF. However, when interest rates started moving up in early 2006, it hit the bank hard as most of this portfolio was at a fixed interest rate of 8 per cent.

The indifferent performance saw the bank come under the RBI’s microscope. It is also no secret that the Hindujas have differences with the RBI. The central bank would love it if they were to dilute their current 28 per cent stake in IndusInd to about 10 per cent. But the family may not oblige. “They (the Hindujas) will not get out,” says a source close to the family.
Meanwhile, the new management at the bank has been promised a free hand. If the team delivers the goods, IndusInd Bank may escape the RBI’s radar and, instead, blip on the radars of potential suitors.
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(Businessworld Issue 29 July-4 Aug 2008)

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