A bachelor of mechanical engineering from REC, Rourkela, Mr. Subramanian Kumar possesses over 15 years of rich banking experience. Mr. Kumar started his career with Bank of America in 1986. He also handled retail operations of Standard Chartered and HDFC Bank after tenure of over 6 years with Bank of America.
In April 2001, he joined IDBI Bank, a new generation private bank, as Head – Operations. He is responsible for the product development group of IDBI Bank and has implemented all core banking applications for the bank. He has also developed all process manuals for the bank.
In an interview with Equitymaster, Mr. Kumar spoke about the trend in the retail banking industry (home loans in particular) and IDBI Bank’s strategies to become a premium bank in the next 2-3 years.
EQTM: In the home loan segment what kind of challenges IDBI Bank is facing in terms of bad loans?
So far we have not faced problems of bad loans in housing, as ours is a very clean book. We grew our loan portfolio by nearly 300% last year and this year also it could see a growth of about 500%. It’s a young book and has definitely a long way to go. One good thing is that we make sure that all our systems and procedures are in place. We have put in fairly robust backend system for booking the loans and web based front-end credit system to make sure that we filter the customer’s needs. We spent fairly large amount of time in evaluating the loan. Our rejection ratio is very low. Not that we approve everything but we make sure that we get the right cases. We can’t afford having bad loans.
EQTM: Do you see consolidation happening in the industry due to large number of small players?
The industry is definitely set for consolidation. What is happening now is that banks with low cost of funds are probably the ones, which are making money on the home loan front. Banks may probably drop out if they are not yielding returns. Consequently, in long term consolidation is bound to happen. Home loan market is for big players, who intend to remain in the market for long. One can’t enter this market for a short term. You need a very strategic view and need to offer the product according to time and requirement of the customer.
EQTM: What will be the unique selling strategies of IDBI Bank in the competitive retail market?
Our commitment to customers is that we will offer the best products and services that the banking industry today offers. This is what is reflected from our service credo (‘What can I do for you’). Home loan is not a commodity product. Its not like buying auto loans where customers don’t care from which bank it is coming. For home loan, the consumer looks at it as a long-term relationship. Home loan first gets converted to saving account and then it gets converted into salary account and thus a relationship account. So consumer looks at the product very differently. We are happy to see the speed at which consumers are coming to our bank, which has helped fuel the growth.
EQTM: What are the untapped opportunities available in the segment?
We are currently present in 11 cities (for home loans) while on the liability side we are present in 62 cities. So untapped opportunity for us is to go out to the remaining number of cities and reach customers with whom we have liability relationship.
EQTM: Give us a brief idea on the challenges faced by the sector in the wake of globalization.
There is a market of large multinational banks, which are willing to buy out private sector banks. Today MNCs are constrained by branch networks and they can only put offsite ATMs. However, in the Indian banking scenario, ‘Brick’ is still important notwithstanding the ‘Click’. At the moment, these MNC banks are not present in the Tier-II cities. But MNCs moves to acquire private banks could affect the prosperity. However, currently our main competition is from public sector banks and not these MNC banks. In terms of technology backend we are probably superior to some of the large MNCs. Ultimately the cost of delivery and the price at which we offer the product to customer will be a differentiating factor.
EQTM: What are the potential risks of foraying aggressively into this segment?
As long as your credit criteria are right, retail assets will give you far superior returns than corporates. Your credit processing system and backend system (for collection purpose) needs to be strong for a successful venture into retail financing market. Any bank that has got these two processes right, can really scale up and build portfolio of large size. For example Citibank.
EQTM: When do you expect to launch a credit card? What would be your business strategies in this area?
The bank is coming out with its debit card in the next few days, which will be the first step before we launch our credit card. Debit cards allow you to understand the consumer behaviour. They also allows you to decide pre-approved credit card limits, based on savings pattern and spending pattern of the consumer. Any bank that wishes to launch credit card product needs to have huge retail customer base of its own. By the end of this financial year, we hope to have about 0.9 m customers. This itself is a critical mass for us to come out with a credit card product because the loyalty of our own banking clients towards our banking product would be far higher.
EQTM: Low cost funds accounted for 34% of the bank’s total deposits, enabling the bank to reduce its cost of funds to 7.5% in FY02. Do you think these ratios can be improved further and how?
If interest rates come down further, which appears from banks like SBI dropping their deposit rates, then definitely our cost of funds will reduce. Our low cost deposits to total deposits ratio is a number that changes from time to time. It will always remain in the range of 34-40%. The bank has large corporate loan accounts, which we support with both retail deposits and corporate deposits. HDFC Bank has one of the lowest ratios probably due to its good cash management services (CMS) business. In our bank also, this business has taken off last December. Our volumes are about Rs 200 bn currently and are expected to increase further.
EQTM: What is the bank’s lending strategy for corporate loans?
Focus of the bank has been to lend to top tier corporates. Last year we have significantly de-risked our loan portfolio. Currently almost 84% of our corporate loan is to ‘A’ rated customers. This ratio has improved considerably over the last one year. As a policy, we don’t lend more than 10% of total loan portfolio to one sector and we have identified 4-5 sectors (for example telecom, petrochemicals) to focus on.
EQTM: IDBI Bank has indicated to raise capital before September end. What would be its impact on the bank’s growth plan and business in absence of required capital for the first six months of the current year?
So far, absence of capital has not impacted our growth and we are in line with our business projections. The bank has been in the process of finalizing capital and we will decide it soon.
EQTM: What is your vision for the bank for the next five years and how it would be achieved?
Our vision is to make IDBI Bank, one of the top 2 private sector banks in the country and it remains a highly profitable one. The focus of the bank has been on bottomline and not market share.
EQTM: A word on your favourite book and personalities that have influenced you?
My favourite book is from Jack Welch, ‘Straight from the gut’. I think it’s an outstanding book. He is also a personality whom I admire the most. Another person, I really like is Mr. Narayan Murthy, for his humbleness and his ability to create wealth for his people. It’s a truly inspirational story. Our new president Mr. Abdul Kalam is also a personality to get influenced by. His achievements are amazing, without any political support and inspiring for any Indian.
Mr. Kumar's views on Home Loans