Diptesh Shah is a chartered accountant with nearly 22 years of work experience in the Indian financial markets. His experience covers a role in developing secondary market, financial advisory services, management of capital market exercises, business generation, client relationships, depository services and investments in capital markets.
Presently, Mr. Shah is an Executive Vice President at one of India’s leading private sector banks Global Trust Bank, looking after their Investment Banking activities. He drew the blueprint of GTB’s role in India’s capital market and now oversees the bank’s total interface with the capital markets and is involved with its fund-based role in the capital markets (including services like clearing bank operations) as well as the bank’s depository operations.
In an interview with Equitymaster.com Mr. Shah spoke of trends in the banking industry, the impact of GTB’s merger with UTI Bank and the management’s vision for the bank in the next four years.
EQM: What is your view on the recent consolidation trend in the banking industry?
Mr. Shah : Mr. Subramanyam said at the time of merger that size does matter in the banking industry. Now there are two ways of increasing the size. One is the inorganic growth and another is through consolidation. But consolidation is not an easy task to do. For that we need a lot of common factors. To that extent UTI Bank (UTIB) and Global Trust Bank (GTB) were lucky enough with a list of common factors. Both the banks have people with same mind set, more or less same technology and the similar backend software. There was no re-engineering of knowledge in either of the banks as far as day-to-day operations are concerned. As far as the customer interface is concerned, services offered by both the banks are similar. Also, the combined entity is gaining in terms of network expansion with 158 branches and more than 280 ATMs. There won’t be any major overlapping of branches except around 8-9 branches. We will not shutdown any of these branches but its location could be altered to get the maximum benefit. Branches of both UTIB and GTB are equally spread across the country. This combination of branches and ATMs is expected to make a powerful network. Now the challenge is how fast do we grow with this expended base.
EQM: What is the biggest challenge the bank is likely to face in consolidation?
Mr. Shah : Any merger requires a change of thought in both the organisations. So far you were operating in your islands and now both the islands are combined together to make a large country. There would be people issues, fitment issues and problems of different operational processes in the two banks. Banking is a people’s business so employee related issues needs to be sorted out first. Both the banks were operating in a different way in the past few years, and now they have to come to a common platform of operating, and there could be gaps.
However, managements of both the banks are very emphatic in the sense that there will not be any redundancies. Why, because both of us were very lean organisations to start with. Given the rate of growth we still require people 4-5 months down the line. So the existing manpower is in fact required to be retained. After the merger we will have employee strength of around 2,000. Initial apprehensions in the minds of employee were due to lack of knowledge. As a result we are setting up communication channels with the staff. There is an integration committee headed by a Chairman, which deals with every employee related problem.
EQM: What would be your ideal wish list from the finance minister this year and what are your expectations from the budget for the banking and finance sector.
Mr. Shah : I think the government should initiate the process to uplift the financial services sector as a whole in line with those of advanced countries. What they have over there is far more players in the financial services sector than India has, like banks, insurance agencies, mutual funds and NBFCs apart from pension and provident funds. We need many more segments to enter the markets. Each one has a restricted role to play. If those restrictions were slowly removed the end beneficiary would be the man on the street. Since he gets better value for money, better returns and better services, which today he is deprived off. By now India has developed a regulatory environment. Given that we can certainly experiment with pushing the financial sector up the ladder.
EQM: After the merger with UTI Bank, Global Trust Bank aims to create the largest private sector bank in terms of assets, deposits, profits and branch network. With such large resources at its disposal what are the sectors the bank is planning to target?
Mr. Shah : After the merger we aim to have a balance sheet size of close to Rs 500 bn in the next three years. While UTI Bank is focused on more in the middle and upper middle segment, GTB is more in the middle and lower middle segment. So to that extent there would be a broadening of approach as far as the advances are concerned. GTB is a far bigger player in the capital markets than UTIB. So the combined entity is expected to have a sizable share of the capital markets. In terms of deposits, GTB targeted retails couple of years back while UTIB is just one year old in the segment. But UTIB has faster rate of expansion than GTB. Nevertheless, both of them as of now don’t have any significant retail assets. Its only retail deposits and saving deposits what we have on the liability side. So the first thing on the agenda is to increase the retail asset base in a much more rapid way than earlier. Also there is lot to be done to increase the retail customers of the bank. As a merged entity we have the advantage of tapping the customers of UTIB and leveraging them in a much better way. The growth is expected to be very heavy on the retail side. UTIB has access to 40 m unit holders and we can offer combined services to them.
EQM: Global Trust Bank’s cost of borrowings is comparatively lower than that of UTI Bank. After the merger operating margins are likely to come down due to lower OPM of UTI Bank. In view of this how do you plan to improve the profit margins in future? Also what were the reasons for a decline of more than 200 basis points in OPM during the quarter ended December 2000?
Mr. Shah : We do not see any increase in margins in near future and should be able to maintain the average operating margins (around 18%) in the next three to four years. There was a general reduction in the interest rates as far as the lending rates are concerned in the last 6 months but there was no corresponding drop in the borrowing cost. Money markets picked up in August ‘00 and started declining after October ’00. This squeeze was reflected in the first nine months performance of GTB. Today, the borrowing rates are lower for GTB; as a result the squeeze is easing. But again due to the recent natural calamity we are likely to have pressure on margins. The combined entity would have to look at alternate methods for shoring up their bottomline.
EQM: How does the combined entity plan to tap the new growth areas and improve productivity ratios?
Mr. Shah : We could be distributors of lot of capital markets products such as mutual funds, debts, equity and other similar products. Also to maintain the current rate of margins we will have to build up the retail assets, as the margins are slightly higher there, compared to normal conventional lending. But this is something, which requires a good developmental time to get it fully implemented.
EQM: What is the strength of the bank in cash management services in the scenario of increasing competition?
Mr. Shah : Currently, GTB is not a major player in cash management services. UTI Bank however, has a very strong cash management system that needs to be expanded substantially. The need of the market is far larger than what three or four banks can provide today. Corporates already have accounts with other major private sector banks but they are still willing to open an account with GTB. It is true that the top 1,500 companies may be fully satisfied with the existing arrangement but there will be other 800 companies who still require this product. We believe, there is still a major market to be tapped for cash management services.
EQM: How much does the retail deposits contribute to total deposits as on December 2000? After the merger with UTI Bank what will be the likely ratio? What ratio does the bank plan to achieve two years down the line?
Mr. Shah : The composition of retail deposits in case of GTB is actually 80% if you look at the money individuals have given. It is in the form of both saving accounts and fixed deposits. The combination of both we call as retail deposits, and we have a fairly comfortable ratio. Some form of institutional deposit is also necessary in the bank apart from retail deposits. I agree to the fact that out of the 80% retail deposits, share of savings bank account is quite low. However, it takes time to build up a strong savings account base. GTB was entirely a retail bank when it started operations in 1994. But we were a late entrant in the retail market. However, after the merger we expect the current ratio of savings accounts (5% of total deposits) to improve to around 8-10% with more retail and capital market related assets.
EQM: Please shed some light on the Vision 2004 of the bank in terms of increase in deposits, advance, and expected revenue and profit growth.
Mr. Shah : We should be straddling a fair portion of the financial services industry. It could be banking, capital markets or retail assets. If you look at the total financial market, UTI Global, along with its associates should be commanding a leadership position in the industry over the next five years. We may have India’s largest bank, the largest mutual fund, the largest securities firm and probably the largest insurance company.
EQM: Which 3 books influenced you the most?
Mr. Shah : I like to read lot of fiction books. My favourite one is P.G. Woodhouse’s ‘The flag bearer’. I also liked reading ‘Atlas Shrugged’ by Ayn Rand.