K.V.Kamath, Chairman, ICICI Bank: Making an aggressive play for the retail pir

As you read this, Kalpana Morparia, Executive Director, ICICI Bank, would have just returned from a whistle-stop roadshow in Europe, covering Frankfurt, Paris, Milan and London, amongst other European cities. Morparia, who heads the investor relations function (along with human resources), would have been armed with a clutch of presentations -- including a slideshow on the bank's performance in the first six months of 2002-03 -- which would have been made to prospective investors in a bid to woo them to buy into ICICI Bank stock. Perhaps she would have also carried copies of The Banker Magazine, which recently chose her bank as "The Bank of the Year". One magazine Morparia surely wouldn't have taken along is Business Today (the magazine in your hands). That could be because the ED of India's second-largest bank might have left for Europe before BT hit the stands in India. But there's another reason why Morparia -- or any other ICICI Bank head honcho, for that matter -- won't be too keen to wave the BT Best Banks special issue in investors' faces: The banking behemoth is rather uncomfortably perched at No 19!

There is a reason for that short-term blip: The merger of ICICI into ICICI Bank, which took place towards the end of the previous financial year. For one, the merger reflects only two days of the financial institution's (FI's) profits. For another, ICICI Bank had to sell some quality paper (worth Rs 4,000 crore) and resort to high-cost borrowings, which were needed to meet liquidity requirements. This has had a twin negative impact: Lower profits (by close to Rs 200 crore), and a magnification of the bad assets (since a chunk of the good paper had to be sold), much of which has been inherited from the former FI. As result, ICICI Bank compares poorly with other banks on the earnings and asset quality fronts. For instance, when it comes to the operating profits/average working funds ratio, ICICI Bank lags behind the likes of ABN-Amro, Karur Vysya, Corporation Bank and Citibank. The non-performing assets (NPAs) to net advances ratio, meantime, is much higher for ICICI Bank than for the foreign banks and private banks like HDFC Bank (See The icici-icici Bank Merger Has Created A Short-Term Blip... ).

Not Top Dog Material
No 19 may appear uncharitable, but conversely it's difficult to imagine ICICI Bank figuring at the top of the heap, either. True, post-merger it now has a balance sheet that's Rs 1 lakh crore in size, comfortably making it the second-largest bank in the country, after the State Bank of India. With 500 branches, ICICI Bank also ranks second in terms of network, and with 1,200 ATMs and the largest call centre (1,700 seats), the reach cannot be sneezed at. But the merger has also brought along with it a huge headache in terms of the non-performing liabilities (NPLs), with the net NPL constituting 4.9 per cent of ICICI Bank's total assets as of September 30, 2002. What does ICICI Bank do with this Rs 2,880 crore unenviable legacy it is saddled with?

One way to go about that task is to provision for these bad assets. That ICICI Bank has duly done, utilising the Rs 1,200 crore it earned as capital gains courtesy the merger along with a Rs 500-crore deferred tax benefit to provide a firmer cushion to the Rs 3,800 crore provision already made at the time of merger. But the way Chairman K.V. Kamath and his A team see it, they may not have to use that padding. For, by aggressively expanding the retail lending pie, even as it pulls out all stops on the loan recovery front, ICICI Bank hopes to significantly derisk its operations in a couple of years. "In five years, the retail component of our overall loans should be close to 45 per cent," says Morparia. "And in 18 months, that is by September 2004, I won't be talking any longer about my legacy NPAs. We would have reined in our NPL levels to the international benchmark of 1-2 per cent by then."

Brave words, those. Is the ICICI Bank Executive Director going out a limb with those projections? "The retail thrust definitely augurs well for ICICI Bank. But a question mark hovers over its ability to recover all its bad debts in a reasonable span of time," points out Rohit Srivastava, Market Strategist at broking firm sski and Sharekhan (the online presence of SSKI).

Indeed, the retail lending blitz of ICICI is on the fast track, and unrelenting. As of September 2002, retail (home loans, auto loans, personal loans) made up 12 per cent of the bank's total assets, double what it was six months earlier. The company claims pole position in home loan approvals for the July-September quarter, even as the retail assets on the balance sheet swelled to Rs 13,460 crore by September, up from Rs 9,943 crore in the June quarter and Rs 7,735 crore at the end of March. "They've done well in home loans (the largest chunk of the retail pie), but their portfolio is still much smaller than ours," says a senior State Bank of India executive.

Road To Recovery
Retail is clearly the way to go, but doubtless what should give the debt recovery thrust a shot in the arm is the Securitisation Act, which allows banks to now negotiate with lenders on equal terms, and sell assets if they feel the need to do so. Other options include leasing or licensing the assets out. Earlier, as ICICI Bank officials will vouch for, it was difficult to catch a glimpse of the borrowers, perhaps the courts being the only place the lender could get a look-in. Now, they've become more forthcoming.

Kalpana Morparia, ED, ICICI Bank

Last fortnight, ICICI Bank sent notices to 16 defaulters, 10 of which actually came forward. Morparia now hopes to conclude cases in six months, thereby ensuring timely recoveries. So chances of cases dragging on for years on end are slimmer, as the banks can now settle outside the ambit of the judiciary and the Board for Industrial and Financial Reconstruction if 75 per cent of the lending consortium gives the recovery go-ahead.

It isn't as if ICICI Bank is in a hurry to get rid of its entire NPA portfolio. The management sees potential for the steel, cement and paper industries as of today, and expects to unravel its huge exposure to the steel sector in six months. The bank isn't averse to restructuring the repayment schedules and interest rates of such loans.

Clearly, the odds of ICICI Bank being able to whittle down its legacy non-performing asset portfolio have reduced considerably in the recent past. But will the Securitisation Act really prove to be the succour banks were looking for? Not everybody is as sanguine as the ICICI Bank top brass. "The Securitisation Act will have more of an impact on fresh loans, and less on past loans," points out Srivastava of SSKI.

You can't also wish away the retail risk, although it's infinitely a safer business than corporate lending simply because the risk is spread over lakhs of borrowers. Yet, it's still a fledgling activity in India, and there are plenty of unknown gremlins that could spoil the party. For instance, how do you manage such a huge borrower base? And how do you ensure that the credit calls you make are on the dot? The ICICI Bank top brass is well aware of these hazards, and is banking on technology to mitigate them.

Rather than manually checking the credit-worthiness of borrowers at the various branches, all that work is done electronically at a centralised back-office "factory". The role of the branches is only marketing and fulfilment. The credit call is made in the factory, where data on borrowers is stored, and which ensure proper validation. Perhaps that's helped in ICICI Bank keeping the delinquent loans at under 1 per cent of the retail portfolio.

The ICICI Bank core team is clear about its objective: Make ICICI Bank dance, asap. That it can make the moves has been made amply evident, but Kamath and Co will also have to make sure in the years ahead that the banking behemoth isn't dancing in the dark.

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