Nirmala Vedula and Ashish Oke: What was your strategic assessment of the banking sector before you took up the IndusInd stint?
Romesh Sobti: Having worked in the state-owned sector for nine years and in multinational banks for 25 years, I believed the private sector banks had the most advantageous business model. The state-owned banks have always had big advantages in terms of geography and coverage – the number of branches, the number of people, that sort of thing. Of course, they also have the advantage of the government’s wallet. The multinational corporation (MNC) banks, on the other hand, had a more elitist but more innovative approach. They brought in technology at a time when it was new to India. They created products, whether credit cards or car loans.
Then private sector banks came in and bridged this gap. They had no restrictions on opening branches, so coverage was not a problem. At ABN Amro Bank for the period of 12 years that I was CEO, we went from three to 33 branches. At IndusInd, you could open 33 branches in two months.
MNCs use templated technology platforms. They have a slightly cookie-cutter approach. Private sector banks changed this. They went for local technologies that were agile and could be adapted to local needs.
The IndusInd offer was an opportunity to operationalise beliefs born out of my experience. One belief is that you have to be a universal bank if you want to do well in India.
The second belief was about technology. What does tech-savviness mean? It does not mean having a computer sitting on your table. We defined it on the basis of our belief that technology must be used to find, serve and engage customers. Even in our digital technology strategy, we have operationalised that same belief– find, serve, engage.
The third idea is that you do not have to manufacture all the products yourself. There are others out in the market who will make them better than you do. Why not become a distributor of third-party products? And distribution became a strong pillar of our approach.
These were the set of beliefs that we could put into play in a private sector bank. In private banks, you can have independence of thought and action, unlike an MNC where somebody in Amsterdam or Singapore decides what you can or cannot do.
The excitement of uncertainty is ever-present. There is no such thing as risk-free banking. The risks were manifold. What is the quality of people that we will inherit? What is the quality of the culture and level of mismanagement? What sort of support will one get from the investor community when one needs capital?
The risks are countered by the strong belief that given a free hand, you can roll out the business model. We were promised and have been given a free hand these last 10 or 11 years. We had the business model ready in the first two months, followed by exacting and detailed execution of the plan.
You always start with a level of uncertainty and you need a few good breaks.
In the current scenario, what do you think are the challenges and opportunities in the Indian banking sector?
Banking is coming out of a deep downturn. The downturn has lasted longer than usual. I have seen many turns of the cycle in my 45 years in banking. But the cycle is now turning. Bankers were bashed for reckless lending and customers were bashed for reckless borrowing. Borrowers who traditionally enjoyed the fact that our filing a suit against them meant 20 years of doing nothing now lose their companies in 270 days. There is a new discipline coming into borrower mindsets, not just lenders. The insolvency process brings discipline.
The regulatory framework has become more accommodating as far as mergers and acquisitions (M&A) is concerned. We have had a bank merging with a bank — Kotak with ING. We had a bank merging with a microfinance company. We have witnessed a non-banking financial company (NBFC) merging with a bank. Now we see a housing finance company merging with a bank.
The NBFC sector has been rocked by recent market events. There is going to be a rationalisation of their approach towards lending. I think more moderate growth with better margins and better risk and liquidity management is beneficial to the banks.
In your stint with IndusInd Bank, what have been your major successes?
Not one of my 15 management team members has left in my 11 years. They are all here. I count that as one of my biggest blessings and successes.
Second, we were able to create like-mindedness in the management team. The manager’s main job is to make sure that this entire team has one common compelling objective. The commonality of objective and interdependencies are the two features of a team.
The other thing which is also one of my personal beliefs is that each one of my team members must be successful because their success aggregated is the success of the organisation. My success is that we were able to make each one of our team members succeed in their respective areas.
Finally, we have created shareholder value which is being recognised by the market.
Were there some things that did not go as per the plan? If you were to revisit these initiatives, how would you possibly change strategy?
One area, that we could do much more in, is employee engagement. Who comes first? We always say it is the customer. There is a school of thought which believes that first comes the employees because engaged employees will get you engaged customers.
Consider gender inequality within the bank. About 22-23% of our workforce is female. Did we take any affirmative action? If you ask anybody in the team or human resources (HR), they will say they have no bias. We simply took that stance which said we are neutral. But today’s world demands that you allow affirmative biases to create gender equality. I think we could have done that.
What is your strategy for inorganic growth in para-banking?
Para-banking essentially includes products like life insurance, general insurance, asset management and brokerage which can generate income and increase our portfolio.
One of our strong beliefs was in distribution. Eleven years ago, we changed the DNA, the operational model of our branch manager and said he or she will essentially distribute products and raise liabilities. Lending was never part of the portfolio. Distribution has played out very nicely for us. Today if we have a Return on Assets or Return on Equity which is more than decent, one of the reasons behind it is the income from distribution. We are efficient distributors of third-party products like asset management, insurance and brokerage.
Eleven years down the road, we believe that while we are capturing some value as a distributor, we are also giving away huge value to the manufacturers. Having learnt the business through distribution all this while, we should capture that valuation as well.
That is why we started thinking about para-banking in insurance and lifelong asset management. We are efficient distributors. We want to now migrate to become manufacturers. The other element here is that, as a bank, you have a variety of products and services. If you really want to achieve total customer-centricity, then you should go beyond what you are already offering customers to what they are going to buy from others. When I sell insurance to one of my customers I am not selling my product but somebody else’s. I am losing some of the customer-centricity.
We are large distributors of life insurance and general insurance because we finance a large portfolio of vehicles. Every vehicle has to be insured. It is almost a captive customer base. We have an open architecture for mutual funds sales. So we are eminently qualified to become an asset manager. We have tens of thousands of customers who use brokerage services. We also have a brokerage tie-up with another broker where two-thirds of the value goes to the broker. One-thirds of the value stays with us. We expect a huge valuation gain as a consequence of getting into para-banking.
There is a lot of interest in social forms of lending — green lending, impact lending and livelihood financing. Where do you see the promise and the pitfalls for the private sector?
Let us take livelihood financing. I did livelihood financing 44 years ago in deep rural Bihar for the State Bank of India on a scheme for small and marginal farmers.
Let me give you an example. We are probably one of the largest financiers of two-wheelers in the country. We finance two lakh two-wheelers every month. The issue is: who do you finance? We finance the plumber, the newspaper delivery person, the milkman or the carpenter who till recently used a bicycle. The two-wheeler is livelihood support. He will not default because if I seize his two-wheeler, he will lose his livelihood. This is how it works. As it is in the form of a mortgage, the rates are high. The slightly higher risk for a mortgage is mitigated because it is livelihood risk.
We do not finance the fleet of 100 vehicles. We finance the guy who wants two vehicles. If I seize the vehicle, there is no food on the table. Livelihood financing really works. It is a sustainable business model.
A similar argument applies to microfinance. People ask us why we went for the merger with Bharat Financial Inclusion. Microfinance is the smallest form of livelihood financing that you can do. The lady who borrows ₹ 20,000 the first time around and repays it in the first 12 months has to borrow again. Our impact studies have shown that the first loan is actually used to repay the loan shark who is charging 60%, 70% or 80%. The interest differential between the 70% or 80% and what we are charging which is under 20% itself releases the cash flow to pay it back. The second loan after 12 months starts with normal activity and the third loan takes the borrower out of poverty. That is what attracted us to microfinancing.
Today we are very proud to say that 40% of our loan book is actually livelihood financing. That number does not include Bharat Financing. Our target is to get to 45% in two years’ time.
The other ones, of course, are refinance and impact finance. They are part of sustainability. The rest of the world is moving that way. India is not yet a part of the Equator Principles.[1] Most banks do not participate. ABN Amro was one of the few that did.
At IndusInd, we have introduced within our lending ecosystem checks and balances on what we will not do and what we will do. Green is one of them and impact lending is the other one. It is all part of our whole agenda of sustainability. We do business today in such a way that the next generation is able to do theirs. Livelihood and impact lending are embedded in the DNA of the bank now.
We may be one of the first banks to come up with Environment, Social and Governance (ESG) targets.[2] We plan to come out with specific targets and get them audited. We just finished the process of buy-in within the organisation. It was an inclusive process that had to come from below. We hope now to roll out and articulate these targets to the external world in the next few months.
Sustainability should be at the core of everything that we do. So when the relationship manager who is doing a loan proposal looks at it, he or she must go through the grid saying that this must fill the ESG agenda of the bank, right down there. That has not happened yet.
With the acquisition of Bharat Financial Inclusion Limited, what are the differentiated products that you would like to see at the bottom-of-the-pyramid market?
Lending products is what Bharat Finance does today. It is a monoline lender. It only does microfinance. We can expand on that because while the customer is borrowing, she is also saving money.
Payment products and savings products are called ‘wealth products’, though they are not wealth in the sense that we understand it. They show some dimension of investment.
In rural India, every village is now supposed to be electrified. What do these new consumers want to buy first? They already have mobile phones. Do they want to buy a TV or they want to buy some gadget for the house? Who is going to finance that?
Say a borrower has two roll-overs of loans from us. She or he has a track record. Therefore, we will finance the consumer purchase. Second-hand two-wheelers are a hit in rural areas. We will finance that as well.
What about inculcating a saving culture? Say your consumer saves ₹ 2500 or 3000. Where will she keep it? This was one of our pilots. The customer may walk 17 kilometres every month to either deposit money or withdraw money at the nearest branch. We have an experiment going on in kirana stores.
Together with the management of Bharat Financial Inclusion, we are very excited to roll out this new vision across the next two or three years. We already have close to 9.5 million customers. They cover 115,000 villages out of India’s 600,000 villages. Imagine the potential to roll out such products. It gives us access to rural India like we never had before.
We are an urban bank. We have about 250 or 300 branches. We may have gone to 500 or 600 branches. But there is a lot happening in rural India — electrification, sanitation, rural roads, car, mobile, infrastructure. There is more than anecdotal evidence that wages in rural India have started moving up and unemployment is moving down slightly.
We would never have been present in rural India if we had not heard of Bharat. Bharat comes in and gives us that huge platform. There are 13,000 loan officers who go out every day into the villages. Each of them covers five to seven villages every day on a two-wheeler. That sort of access to rural India is a fantastic opportunity.
Microfinance will become about 10-12% of our loan book with the Bharat merger.
You spoke earlier about the bank’s digital strategy for acquiring, servicing and engaging customers. Could you provide some more perspective on this strategy?
With microfinance, altogether we have about 11 million customers. Vehicle finance has three million contracts; the consumer bank has savings of five million or so customers. The consumer bank does not think of selling two-wheelers to them. The job of vehicle finance is to sell two-wheelers.
Convenience is at the centre of our client experience. The large initiative we started two and a half years ago is really about convenience. What does convenience mean to our customers? It has to be seamlessness. There are different parts of the bank to serve this one customer need, but it has to be done in a manner that is seamless, easy, fast and transparent. Use technology to provide convenience. That is really serving customers.
The third element is engagement, which goes beyond service. The most rudimentary example of that is you go into a bank and encash your cheque in three minutes. You have been served well, but were you engaged during that time? Did anybody come and talk to you about other things? Were you recognised as a customer? Did the teller address you? That is an example of engagement that goes beyond service.
Customer service is a hygiene factor. Hygiene means every bank does it. Encashing a cheque in three or five minutes is the range. But if you go beyond hygiene and you find that the customer wants more, that is the engagement.
To engage our customers, about ten years ago, we came up with a first-in-the-world offering out of our ATM. The ATM is usually a hygiene factor. You put in your card, feed in your number and money comes out. Somebody in our marketing department pointed out that they never got the notes of their choice. They did not want ₹ 1000 notes. They wanted ₹ 500 and ₹100 notes. This is why we came up with the idea of IndusInd Choice Money. Most ATMs are customised. If you ask for ₹5000, it gives you four ₹1000 notes, one ₹500 note and five ₹100 notes. It used to be standardised and programmed that way. Now it can offer six different options. Using technology to do these things is a differentiator.
What this initiative did was that it really engaged the customer. The slogan was “Aap ne chaha, hum ne kiya”. “You desired but never asked. We gave it to you.” We were the first in the world, whether in the US, Asia or Europe. Now another two or three banks have also started similar offers.
You have initiated Client First. Can you tell us more about the programme?
We ran through a database of five or six years of complaints. We found that most of the complaints revolved around issues of inconvenience. That is how we derived the seamless, easy, fast and transparent (SEFT) principles. If you get these elements right, you have given the client what he or she really wants. That is the stage where we are today. Client First is a customer experience initiative. We have worked with McKinsey on it for the last two and half or three years. It is beginning to show results. Give it time and it will become a game-changer.
How do you see both Client First and digital strategy extending to livelihood customers?
Everything that you do for an urban customer, you can do for the rural customer. For instance, if our customer walked 17 kilometres every month to either deposit or withdraw money, we have used technology to create convenience for him or her. He or she need only walk around the corner to the kirana store.
For young and mid-career executives, what would be your advice for shaping careers?
It can only be generic advice. It cannot be specific. Each individual has his or her own way of managing their career. For myself, in 45 years, what went right were really a couple of things that I keep repeating. One is that you honour your commitments. If you tell a customer that you will call him or her back, you must call back even if it is to say no. That deepens relationships.
The other part is advice given to me by one of my bosses in Grindlays Bank when he came to hand me my promotion. He put his arm on my shoulder and said, remember your friends on the way up, lest you need them on the way down. Now that seemed like a very innocuous statement. What he was saying was that you are not the success that you think you are because you think you are superior as a manager. It is the ecosystem that is supporting you that made you better. Do not forget that ecosystem.
[1] A risk management framework adopted by financial institutions to support responsible risk decision-making. For background on the Equator Principles, see: https://equator-principles.com/
[2] Financial Times has defined ESG as “a general term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies. “ For more about ESG, see: https://esg.org/