Mr. P. H. Ravikumar is a CAIIB and AIB (London). He possesses the rich 29 years of banking experience. During these years he has functioned at various levels. These include a head of branch operations at Bank of India, foreign exchange dealer at BOI’s Paris branch and head of treasury & international relations at ICICI Bank.
Currently he is operating as the senior executive and vice president in charge of Corporate Banking at ICICI Bank Ltd., a premier private sector bank in India. Being on a senior management position at ICICI Bank, he is responsible for the different functions of the bank and is also a part of the bank’s policymaking body.
In an interview with Equitymaster.com Mr. Ravikumar spoke of trend in the banking industry, the impact of merger with BOM on ICICI Bank and the management’s vision for the bank in the next four years.
EQM: How do you see the consolidation happening in the banking industry?
Mr. Ravikumar :If you see the biggest factor, which is pushing the consolidation in the Indian context as well as in the global context, it is the cost of capital and the capital adequacy regulatory requirements. Increasingly the capital adequacy requirements are being tightened globally. Any banks, which wants to grow, needs to continuously tap the markets to raise the capital adequacy requirements. Organisations, which are not in a position to raise the capital, (either because they don’t have that sort of presence in the markets or because investors are not happy with the performance of the organisations), in the long run I believe, have to downsize themselves, and become regional player. They may have to consolidate themselves with the other entity so that the merged entity probably would have larger scales of operations. That’s what is happening globally. In the Indian context the major factor preventing consolidation, was the government’s holding in the public sector banks, which is proposed to be diluted. Also some of the important issues, which need to be solved, are the staff and the group that takes over the banks. Would they have freedom in rationalizing the branch or would they be permitted to close the branch or relocate the branch. Now these issues I believe in the next 12-18 months would bring out any clarity from the policy angel. Once this clarity comes, I believe not merely the Indian banks but global banks would come to India to acquire the banks.
Already you have seen Mr. Rubin of Citibank making a statement in the last six weeks that they are looking keenly to the Indian markets development and they would like to grow in India by making acquisitions. Mr. Aman Mehta of HSBC has also given similar kind of statement.
Also look at what had happened in SouthEast Asia, before the crisis and after the crisis. Before the crisis HSBC, Standard Chartered and Citibank, were not among the top ten banks in any of these countries. After the crisis they have acquired local banks. Today in each country one of these bank is among the top three banks. We believe, this thing to repeat in India. And for groups like us, our strategy is to position ourselves in such a way that we are not at disadvantage when these large groups come to India.
EQM: What are the major problems that Government banks face in mergers and acquisitions?
Mr. Ravikumar :First of all, today nationalized banks do not have any freedom in decision-making. To give you an example; ICICI Bank’s plan of merger with BOM was completed in less than 13 days. You need tremendous freedom in decision-making since these are commercial decisions. You cannot afford to have bureaucratic process to decide commercial decisions. Secondly, statutory difficulties will also have to be taken into account. All in all, I feel consolidation is not going to take place right away. But it will definitely take place in the next 2-3 years. The process for consolidation for government banks would be slow, as they require both RBI and Government of India (GOI) approval. Where as private sector banks needs only RBI approvals apart from shareholders approval.
EQM: Kindly give us a brief idea on the current trends in the banking industry. What role do the banks play in development of the country?
Mr. Ravikumar :In the next 30 years, banks are expected to be a catalyst for development. But I do not believe in banks having a social role. I feel banks are commercial organisations basically. They receive the savings of public in trust, to be managed prudently and to return them to the depositors who want it on a particular time. Especially developmental role is assigned to the government and governmental agencies. But for a variety of reasons, none of the state government and central government arms could perform their role efficiently. So they found another entity (banks) to perform this role, which was not intended initially. Definitely, banks can play an important role in the development of the economy but on a commercial basis not on a promotional or a social development role. It is the role of financial institutions like ICICI, IDBI, IFCI and EXIM Bank. These are all the agencies, which are designated for the purpose.
EQM: What is your view on the interest rates and inflation rate and how do you think this will affect ICICI Bank’s spread in future.
Mr. Ravikumar :Interest rates in our county are market driven. The RBI has substantially freed the control on the interest rates. We are seeing interest rates flat up to end of the fiscal year with a slight southward move. Since all banks deal in money, interest rate is inherent risk in our business. So volatility in the interest rates definitely affects the business of the bank. But since it is an integral part of our business, we have learned how to manage the interest rates volatility. Today with the impact of oil prices being passed to the domestic consumers, inflation has been fully absorbed. We see inflation rate between 7-9% for the current year.
EQM: What were the key factors that led to a merger ratio being more favourable to Bank of Madura?
Mr. Ravikumar :We have looked some 6-7 parameters at the time of valuing BOM. It is a 53-year-old organisation. They have higher book value per share (4 times higher than ICICI Bank), higher EPS (6 times higher than ICICI Bank) and large network. They have large reserves (Rs 2.6 bn) and comparatively low equity. This indicates a higher book value per share. That means all those shareholders who have for years together have agreed for profits being not distributed, but brought back into the business, do they have to give it up, merely because the two banks are merging. Also their RONW is 2 times better than ours. Another factor is the higher dividend, which BOM pays (55% whereas ICICI Bank pays only 15%). BOM has a strong national presence in all the key locations. Out of their top 100 centres in India we get 40 centres where we do not have a presence. If we would have to grow at a current pace, these 40 new centers would have taken us 4 years. I agree that on the market value we are twice their average. But when there are 5 positives in favour of BOM we have to decide the merger ratio in favour of them, keeping in mind the advantages, which ICICI bank is likely to enjoy after the merger.
EQM: After the merger with BOM, ICICI Bank would be the largest private sector bank with an asset base of over Rs 160 bn. With such large resources at its disposal what are the sectors the bank is planning to target?
Mr. Ravikumar :We have become retail on liability sides. The merged entity would have 65% of its deposits from retail. Our medium term plan is to take it to 75%. On the asset side almost 95% of our assets are corporate assets. Thus just 5% are retail assets. Therefore the major area for us to grow would be the retail asset base. Among corporate assets also there are several segments. One segment is small and medium enterprise (SME) and on the other side you have agricultural and micro lending. We would lend to trading companies in the SME and not the manufacturing companies.
EQM: Integrating Bank of Madura from a human resource point of view will be a difficult task. Your comments on this. How will it affect the productivity per employee of the merged entity?
Mr. Ravikumar :Integrating BOM with the bank would be definitely a challenge. But if you look at all our senior management and middle management, they have come from 80 different financial institutions and banks. So if people from 80 banks can come and adapt, and become one in this bank, integrating BOM would not be much of a problem.
Very clearly, if you see the trends in the banking industry growth as well as emoluments is linked to the performance. You look at what has happened in the public sector banks: very rigid systems that don’t have the link to the levels of performance, in the long run hurt the Organisations. I believe, moving to the structures like us where we reward hard work and innovativeness, will definitely increase our productivity per employee.
EQM: Although BOM has large branch network of 263, only 162 branches are computerized and 47 are networked. By what time does ICICI Bank plan to integrate (network) all the branches?
Mr. Ravikumar :
BOM derives 90% of its business from top 120 branches. Even before the merger, BOM was implementing together with TCS, a plan to network all these branches, which was to be completed by 31st March 2001. That plan is already half implemented where; nearly 50 branches out of the 120 branches have been networked. We are only re-looking to see that those are robust enough, to carry the sort of load, which we would be bringing in.
EQM: BOM’s non-performing asset to advances ratio is comparatively higher at 4.8%. This is likely to affect future profitability of ICICI bank. What steps have you planned to bring down the NPA level and what is your target level for the next two years? How will the slowdown in the economy affect your loan portfolio?
Mr. Ravikumar :We are planning to bring down the level of NPAs for merged entity to 1%. Slowdown in the economy affects if you have larger exposure to small and medium manufacturing units. We have already moved away from this sector. In case of BOM also, they have large exposure to small and medium size trading sector and not manufacturing segment. Therefore I do not think that a slow down in the economy will affect my loan portfolio.
EQM: How does ICICI Bank plan to utilize the ADR proceeds?
Mr. Ravikumar :As of now we have not kept our ADR money unutilized. It was always been invested in various assets. So if we were to do a cash deal, we had to sell some of our assets and buy the shares. I find nothing wrong in stock deal if it is in the interest of the shareholders in the long term. Our ADR proceeds are intended to grow our asset base, to buy fixed assets for our normal business, to invest in technology and also to acquire other banks. Immediately after the ADR issue our capital adequacy became 19%, and today it has come down to 17%. This is because we have grown our assets. One-way of utilizing an ADR proceeds is to fund our incremental assets.
EQM: Please throw some light on the bank’s plan to convert itself into Universal Bank. What will be the impact (both on financials and business) of the reverse merger of the parent ICICI with the bank?
Mr. Ravikumar :The reverse merger of ICICI with the bank will strengthen the financials of the bank. We will become the second largest bank in the country. And size in banking is very important. Our ability to take large exposures and especially to generate substantial fee revenues will tremendously enhance.
In case of financial institutions all their loans are secured against fixed assets, which do not disappear. On the other hand in case of banks if the assets becomes impaired, the current assets are the first to get hit. So relatively the position of FIs (ICICI) in case of NPAs is better than banks. ICICI is also adequately capitalized and secondly its assets are reviewed on a quarterly basis. The combine entity will have a lot of synergies both in terms of financials and business. Currently due to the net worth constraint we are not able to tap large public sector corporates. After the merger the size of the combined entity will be over Rs 900 bn. Also, currently ICICI being a financial institution is not allowed to give credit for import of raw material and ICICI Bank can lend only 20% of its net worth. So in case of ICICI Bank due to size constraint, we are not able to approach large PSUs, which are doing well. After the reverse merger of the parent with the bank, a company like Indian Oil can approach us for obtaining letter of credit. This business has a huge potential.
EQM: What is the strength of the bank in cash management services in the scenario of increasing competition? How much is the current contribution to income from this segment?
Mr. Ravikumar :We are the second largest cash management service provider in the country. BOM merger gives us an adequate scope to become the largest service provider in the country. We see the revenues from this business doubling in the current year. The strong point of BOM is its large network. Today we use the network of other banks where we don’t have a presence, to render the services for us. So we are paying them a recurring charge. With the large branch network of BOM we will be able to save these costs. We have already web enabled our cash management services which currently contribute Rs 120 m to our earnings (11% of net profits in FY00).
EQM: What is your view on the future outlook of call centers (the bank currently has 10 call centers).
Mr. Ravikumar :We are amongst the first to realize that reaching out to customers need not be necessarily through branches, it could be through Internet, ATMs, Call centers. Volumes in the call centres are growing. We believe in the long run call centers will have a good potential to grow compared to ATMs. We provide all kinds of services excepting cash payment through these call centers. Call centre, as a delivery channel is almost half expensive as a branch. So therefore it is at our advantage to migrate more people to call centers because it cuts our expenses.
EQM: Investments contribute more than 40% to total capital employed of ICICI bank. However, yield on investments (9.5%) is lower than the yield on advances (9.7%). What steps the bank is taking to improve the return on investments and to minimize the risk from depending on volatile revenue streams?
Mr. Ravikumar :Out of the total investments more than 60% are in government securities. So even if I don’t wish, I have to put certain amount in government securities as per the RBI guidelines. I have no control on the interest rate on these securities. As per the RBI rules, banks are required to invest 25% of their deposits in the government securities. Globally the ratio is just 5-8%. As a result we do not have any control on the yield of the investment in government securities.
To give you the example: For every Rs 100 the bank raises, Rs 10 goes towards CRR and Rs 25 towards SLR. Out of the balance Rs 65, 40% has to go to priority sector advances where I can’t charge a high rate of interest. So on the balance Rs 40, even if I earn higher rate of interest, the average yield effectively declines. I agree to the fact that the bank is depending on the volatile stream of revenues. However, the classification between the advances and investments is very misleading. If I am giving money to a customer and I put it as a loan account it becomes advances. If the same money I give him as a commercial paper, it becomes investments. It is an accounting treatment but the fact remains that I am lending money. In both cases he pays me the same rate of interest. Since in some companies, where we don’t want to make large medium term commitments, we would lend short-term loans. Investments mode gives us that flexibility which a loan does not give.
EQM: Please shed some light on the Vision 2002 of the bank in terms of increase in deposits, advances, and expected revenue and profit growth.
Mr. Ravikumar :We will be a truly global Indian Bank four years down the line. Today, if you see the financial services companies, SBI is on the top and the second is ICICI. We believe in the next four years we will be number one Bank in India. We also plan to open international offices in the next 2-3 years. We wish to see our self as the largest Commercial Bank in the country in the next three years.
EQM: Who are the three people who have influenced you the most?
Mr. Ravikumar :Most of the people I admire are the ones I have worked with. Mr. N. Vaghul the chairman of ICICI, Mr. K. V. Kamath, the MD & CEO and Mr. Maiya the first chairman of ICICI. I have learned a lot from them.
EQM: Which books you like to read the most?
Mr. Ravikumar :I like reading lot of fiction books. But it is the methodology of McKinsey, which influences me a lot in my work.