• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
  • Editorial Calendar 19-20
BW Businessworld

Branching Out

Photo Credit :

Back in pre-independence India, a motley group of traders, advocates and people from other walks of life got together to start a bank catering to the lower and middle classes of society. Seventy years on, what started as a community-driven bank based in Maharashtra's hinterland is now a network of 105 branches along National Highway No. 4, through Maharashtra and Karnataka. Ratnakar Bank also has a presence in Tamil Nadu, Delhi and Gujarat.

In a world obsessed with bigger, better and faster, the bank was clearly not doing enough. To be fair, however, Ratnakar Bank is not alone: there are a number of so-called old private sector banks — Ratnakar Bank's  licence to operate as a commercial bank in independent India dates back to 1959 — that are trying to shed their fuddy-duddy images and become tech-savvy and modern banks, in a market dominated by three or four large private sector banks — ICICI Bank, HDFC Bank, Axis Bank, and slightly smaller ones such as IndusInd and Yes Bank.

What makes Ratnakar Bank's case interesting is that it is trying to reinvent itself at a time when the banking industry is tightening its belt, so to speak; the economic downturn that has persisted for about two years now has resulted in austerity drives among the bigger banks. Besides, a couple of high-profile attempts — such as the one by Kerala-based Dhanlaxmi Bank, for instance — went awry.

Besides, Ratnakar Bank is much smaller than Dhanlaxmi Bank. The bank's balance sheet is relatively strong, and a number of private equity firms believe that small banks such as Ratnakar are a solid long-term investment. "The underpenetration of banking services in rural India, high potential growth rates, a conservative regulator and high entry barriers for new entrants make these small banks a compelling investment case," says Munish Dayal, partner, financial services, at Baring Private Equity Partners.  

"Ratnakar has been a well run bank in the past from a credit-quality perspective"
Niren Shah, MD, NVP India 
(Courtesy: Norwest Venture Partners)

On The Road To ReinventionDespite the reinvention having started in 2010, and the economy still not having turned around, private equity firms have not been shy of putting their money behind Ratnakar's drive to become a modern bank. It has a healthy balance sheet, a good business story, and is attractively valued. But is that enough? What will ensure that Ratnakar does not falter?

When Ratnakar Bank's board decided on a makeover in 2010, it went all out in picking up a key ingredient for success: the best talent. Starting from managing director and CEO Vishwavir Ahuja (a former head of Bank of America's Indian operations), it hired a range of top-notch talent: Rajeev Ahuja (ex-head, Fixed Income Capital Markets and Sales, Citibank), Shashank Mukherji (from the existing leadership in Ratnakar), Nitin Chopra (ex-CEO of Bharti Axa Life Insurance), Sunil Gulati (ex-group president, Corporate & Institutional Banking, Yes Bank), Suhas Sahakari (ex-head, SME Business, Axis Bank), Shanta Vallury (ex-head, Liabilities Distribution, ICICI Bank) and Naresh Karia (ex-country controller, Citibank). The management revamp also brought in, as part of the board, former Morgan Stanley India CEO Narayan Ramachandran and Girish Godbole, a social development expert. 

As Ahuja points out, coming from a large corporate set-up to a smaller institution seems simple, but is not without its challenges. "There were, and still are, legacy issues," he admits over a cup of tea in his glass-walled cabin overlooking the central Mumbai skyline. He is grateful for inheriting a clean and strong balance sheet, good business growth, and a fairly satisfactory financial story. The positives are coupled with transformation challenges, he adds.For a modern management, taking a long- term approach, backed by a commitment to strengthening existing foundations while building on them, meant gradation of not just processes and technology systems, but also bringing about a change in people's mindsets, he says.

Ahuja knows that the bank's biggest strength is its historic business and consumer relationships: these helped in keeping its balance sheet stable, its asset quality healthy, its ambitions in focus and fuelled its two-phase expansion — phase I was about increasing the presence of Ratnakar Bank in western India; phase II is about covering states with high per capita incomes.


Technology is a hallmark of modernity, and it is no different for a bank. As part of its transformation, Ratnakar recently implemented core banking solution; specialised groups have been created for commercial, retail, agri banking and for financial inclusion. Loan recoveries have picked up too, bringing down non-performing assets (NPA). Archaic business applications have been replaced with integrated systems technology. Even Internet banking systems have been launched. And it has all been good for business.

Promise And ChallengesTypically, the banking sector grows at 2-2.5 times the GDP growth rate; in other words, a good bank can grow at over 15 per cent on a sustainable basis. Over the last 3-4 years, Ratnakar has seen a compounded annual growth rate of 25 per cent. From FY07-FY11, net interest margin — the difference between what it makes in interest income from loans and what it pays on deposits — has been 4 per cent. In FY12, deposits grew by 70 per cent to Rs 3,478 crore and loans by 53 per cent to Rs 2,907 crore.

Analysts agree that Ratnakar's financials are impressive. "Strong rural and semi-urban presence, healthy financials, underleveraged balance sheet, strong management and committed and expanded human resources are its main strengths," says Uday Narayan Dubey, vice president, research, at R.K. Global Securities. 

While the bank's expansion plans are ambitious —200 new branches in the next three years and growth of about 40 per cent — Narayan says they are doable.

But growth needs big capital. In early 2011, Ratnakar Bank raised close to $150 million in equity capital from a clutch of private equity firms: Beacon India Private Equity Fund, Cartica Capital, Faering Capital, Gaja Capital Partners, HDFC, Norwest Venture Partners, and Samara Capital, among others.

"Healthy financials and strong management are the bank's key strengths"
Uday Narayan Dubey, VP, research, R.K. Global Securities

(Courtesy: R.K. Global Securities)

"We really liked the strong management team led by Vishwavir Ahuja, the bank's market positioning, its vision for growth and the fact that this has been a well run bank in the past from a credit-quality perspective," says Niren Shah, managing director of NVP India which has invested $16 million in Ratnakar Bank.

Okay, so capital will not be a problem. But what about its deployment? "The management will have to take some bold steps to achieve growth," says one analyst, requesting anonymity. Others think capital has been kept idle — the capital adequacy ratio (CAR) on 31 March 2011 was an astounding 56.4 per cent,  most of it tier-I or equity. Ahuja is quick to point out that the capital would be deployed over two years. In FY12, CAR was reduced to 28.15 per cent, and the growth in the loan book will cut it to 14 per cent in FY13, he says.

So far, so good. But with rapid expansion comes a whole set of other challenges; for instance, says Dubey, small and medium enterprises are high-risk ventures. In FY11, the bank's profits took a 35 per cent hit, mainly due to pension plan dues, enhancements in gratuity limits and payment of arrears. 

Ahuja says his biggest challenge is integrating two different workforces: one that is steeped in old-world values  and unionised,  and the new-age staff that has never worked on manual platforms.

The bank's small size is no deterrent for Ahuja. He has chosen to pitch himself not against Ratnakar's compatriots, but against the bigger private sector banks, and the smaller public sector ones. "Go on, raise your eyebrows" he says. In banking growth terms, he wants to raise the roof. To deliver on this commitment, he will have to stick around for a while. The way things are going, it will perhaps not take him as long as Ratnakar's been around.


(This story was published in Businessworld Issue Dated 16-07-2012)