Sucheta Dalal :The big race in Indian banking
Sucheta Dalal

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The big race in Indian banking  

Oct 25, 2004

There is suddenly a lot of jostling around for the second slot occupied by ICICI Bank

On the day IDBI’s merger with IDBI Bank came into effect, its chairman M Damodaran told the media that this combine would claim the second slot in the Indian banking hierarchy. When he hinted at merging with a public sector bank, the media speculated that Union Bank of India would be its partner. But within a day of Mr Damodaran’s statement, a newspaper report claimed that Bank of India and Union Bank of India (UBI) planned to marry and the merged entity would be the second largest bank in the country.

Meanwhile IDBI seems set to be saddled with the assets and problems of IFCI and IIBI (after all, it has received a hefty Rs 9,000 crore bailout and is demanding further sweeteners and tax breaks); but it is also keeping alive the speculation that a big public sector bank will share its troubles through a merger.

Clearly, State Bank of India (SBI) remains too big to be part of any race, but there is suddenly a lot of jostling for the second position that is currently occupied by the aggressive ICICI Bank. So who will emerge as the runner-up bank to SBI? And what will determine leadership? Will it be mere size and assets or will profitability matter more?

Four ingredients will make the difference: leadership, technology, branch rationalisation and asset origination. But effective leadership will, by far, be the key determinant says a top banker. Let’s see how various contenders measure up by this yardstick. Dynamic leadership is not in question at ICICI Bank, the current runner-up. Under KV Kamath, it has grown aggressively to capture leadership in most retail businesses that it targeted; and although it is now in consolidation mode, the bank has no plans to yield its position. “We are now growing at a pace that we can digest. And we are, in fact, in the process of selling down our assets to keep our balance sheet lean”, says Mr Kamath.

If leadership is the key, HDFC Bank has it in abundance. It has turned in a consistently good performance and tops in innovation and asset origination. Curiously though, its growth remains hobbled by its parent organisation. HDFC Bank would have been a serious contender for second place, had it merged with Housing Develop-ment Finance Corporation (HDFC). A top banker says, “Had the merger happened two years ago, ICICI Bank may not have had the space to grow into its present leadership position, especially in retail banking. Now each day is too late.” Meanwhile the parent HDFC has ceded dominance in housing finance to several Indian and foreign entities, while keeping HDFC Bank out of the market. Despite this, HDFC Bank will remain among the most significant players in the business.

• The buzz is on who will emerge as the runner-up to State Bank of India

• Of the various ingredients, effective leadership will make the difference

• With IDBI Bank et al in its fold, IDBI can give the SBI a run in terms of size

The other major player will be IDBI. With IDBI Bank, IFCI, IIBI and maybe another public sector bank under its fold, it’ll be ready to give SBI a run in terms of size. IDBI’s advantage is the proven leadership and integrity that Mr Damodaran brings to the bank. But despite his record of turning around UTI Mutual Fund, he has a stupendously difficult job ahead. His five-year term gives him the opportunity to make a difference and he certainly knows how to work around the bureaucratic baggage that is part of the public sector. But, as IDBI’s stock price indicates, Mr Damodaran will have to work very hard even to keep up with the high expectations that investors have from him. Given its peculiar post-merger structure, IDBI will probably be a hybrid organisation that seeks to build on its development banking strength, remain focussed on infrastructure funding and still tries to match the profitability of its more nimble competitors. But infrastructure funding will always be a dicey business in India; it concentrates risk and the mistakes are expensive.

Now that the government has blessed the merger of public sector banks and even offered tax concessions, there are frequent leaks about possible bank mergers. The biggest is the reported merger of Union Bank of India and Bank of India. Will PSU bank mergers create better banks? Unfortunately, not. They will only create bigger banks doing more of the same thing. And unless carefully crafted, the mergers will lead to new problems arising out of different technology, conflicting cultures and an overlap of bank branches. At the same time, political interference, fear of harassment by vigilance agencies, inadequate autonomy, lack of succession plan and the complete absence of monetary incentives to top management will remain major road blocks to growth and profitability.

Finally, we have the foreign banks, whose ambitious growth plans in India have apparently been affected by the RBI’s flip-flop on policy. Indian bankers, however, argue that foreign banks are handicapped by their own reluctance to exploit existing opportunities and pursue organic growth. India offers far more operational freedom and capital flexibility than China, they say. Yet, foreign banks prefer to lobby for concessions that will allow them to grow quickly through acquisitions. In the process, many of them have ended up yielding ground to aggressive players such as ICICI even in retail product segments such as credit cards and personal finance, where they had a dominant marketshare.

How does ICICI react to these challenges to its second position? “We will remain a significant player, but we are not in the race with SBI”, says Mr Kamath. Clearly, he is not going to yield territory. He has had some lucky breaks in the form of rising commodity prices, the steep fall in inflation and interest rates and the fact that his competition let him capture retail markets with relative ease. ICICI now has the time to plan for the future. It also has the luxury of keeping an eye on his main competition, even as Mr Damodaran struggles to clean up his dubious inheritance at IDBI and Aditya Puri struggles to get out of the shadow of HDFC. It will be interesting to see how each of them deals with their own peculiar problems, while working to tackle common problems that will arise out of higher interest rates.

-- Sucheta Dalal