Managing Director & CEO Bhandari: The idea is to target the value-conscious middle-class customer

All it takes is six years and one bad decision. After six years of building assets, it took one rotten apple just a few months to bring a good bank to its knees. When Devendra Ahuja, who ran 20th Century Finance Corporation (a non-banking financial corporation or NBFC), was granted an RBI (Reserve Bank of India) licence in 1994 to found Centurion Bank in association with Keppel Bank of Singapore, it was a time when new generation private sector banks were just beginning to bask in the liberalisation sun. Centurion, however, chose to seek the shade.

By March 2002, Centurion Bank had managed to push its capital adequacy ratio to the alarmingly low level of 4.16 per cent against RBI's stipulated 9 per cent for commercial banks in the country. The immediate cause was the debacle of the Rs 128-crore rights issue the bank had floated in early 2001, but the disaster had been in the making for a while-since 1999, in fact, when Ahuja chose to merge Centurion with his own NBFC. March 2002 was just the culmination. Non-performing assets (NPAs) soared to Rs 101 crore, corporate advances deteriorated by 20 per cent to Rs 1,626 crore, and the bank slipped into the red with net losses of Rs 162 crore.

One month after the abysmal results were announced, promoter Ahuja was quietly sent packing, and V. Janakiraman, ex-Managing Director of the State Bank of India, stepped in as caretaker under the overall supervision of RBI to try and work out a revival strategy.

It was a tall order. By March 2003, the bank's capital adequacy had plunged further to an unimaginable 1.95 per cent, with NPAs climbing to Rs 104 crore. Advances sunk by 20 per cent to Rs 1,314 crore, although net losses were contained at Rs 25 crore. The Centurion scrip had became 'untouchable' on Dalal Street.

Centurion Bank In Numbers

Retail Takes The Cake

Meanwhile, Janakiraman was busy trying to convince prospective investors to recapitalise and rescue the beleaguered bank. Finally, towards the end of April 2003, Janakiraman's efforts paid off. A new suitor was found in Sabre's Rana Talwar (once the global CEO of Standard Chartered) that entered the fray with much fanfare and enough funds to turn around the loss maker.

Talwar's recapitalisation proposal, the first ever for a private sector bank, was a Rs 319-crore credit line extending over a period of two years. With this backing, the bank soon hit the road to recovery, though financials remained under pressure for a while. Capital adequacy struggled at 4.41 per cent; NPAs continued to swell, touching Rs 130 crore; while net losses were at Rs 105 crore by March 2004.

None of this seemed to faze the 56-year-old Talwar, who confidently declaimed while announcing the bank's 2003-04 results that "The excitement begins now." He obviously had what it took to pull it off. Having promised to bring net NPAs down to 3 per cent by the year-end, Talwar and his team went ahead and did just that. "When we took over, we realised that Centurion Bank had a very strong asset engine. It had the ability to generate a large quantity of assets. On the downside, it had poor capital, deposits and systems, but the strong retail assets made up for it," says Shailendra Bhandari, Managing Director & CEO. As of March 2005, the bank's portfolio was more retail-heavy than that of any other bank in the country, accounting for an 80 per cent share. Post-merger, this retail focus continues, but has been reduced to 70 per cent.

Today, Centurion Bank is the best capitalised bank in the country with an embarrassment of riches. Its capital adequacy ratio is at 21.42 per cent, net profits, at Rs 25 crore, net worth at Rs 468 crore and net NPAs at 2.5 per cent as of March 2005.

"The incremental book in the personal loan, mortgages and wealth management areas is growing rapidly in the current year" Vivek Vig Country Head (Retail)

Under the helm of Talwar, the bank is on a fairly dramatic turnaround trip, reaching quite a few milestones at breakneck speed. The interest spread it has, for instance, is the highest at 4.5 per cent, vis-à-vis HDFC Bank's 3.2 per cent and ICICI Bank's 1.8 per cent. The private sector bank also boasts the highest net interest margin of 5.8 per cent in March 2004-05. "The high interest margin was largely because of the retail nature of our business. But we also wanted to increase the fee-based income of the bank," says Bhandari, who has sewn up dozens of alliances in the last one year for his bank. Centurion today sells products of over two dozen mutual funds, markets life insurance policies of Aviva Life Insurance, general insurance products of ICICI Lombard, and has an e-broking tie-up with IL&Fs Investsmart.

Retail business doesn't happen through branches, says Bhandari, who has over 24 years of experience in Citibank, ICICI and HDFC Bank behind him. "We have 2,500 people who sit in about 1,500 two-wheeler dealer offices at about 700 locations all over India. They generate our business leads," he says.

In fact, Centurion is a bank with no promoters. It is managed by independent professionals like Vivek Vig, Anil Jaggia and A. Asokan, all bankers who bring with them the hard-won lessons of two decades spent in banks like Citi, Credit Lyonnais and ANZ Grindlays.

In the two-wheeler segment, Centurion Bank is only next to HDFC Bank and ICICI Bank, selling 40,000 two-wheeler loans a month. In fact, its retail portfolio is heavily skewed towards the two-wheeler, commercial vehicles and construction equipment financing sectors (which together comprise over 60 per cent of its retail portfolio), but Vig, Country Head (Retail) at Centurion, defends this: "The incremental book in the personal loan, mortgages and wealth management areas is growing rapidly in the current year."

Centurion Bank was among the top three banks in terms of its growth in total assets in 2005, which at 29.9 per cent was next only to UTI Bank (56.3 per cent) and ICICI Bank (33.9 per cent), though experts point out that the base was small to start with. Size, however, is unlikely to be a constraint for Centurion Bank, as inorganic growth is also part of its strategy for the future.

In June last year, Centurion lapped up the 10-year-old private sector Bank of Punjab, a fairly strong player in North India. "The merger with Bank of Punjab has brought new business lines, especially in its SME (small and medium enterprises) portfolio, and increased our low-cost retail deposit base," says Bhandari. The branch network has shot up from 100 to 240 and ATMs from 157 to 388, even as it spreads into 122 cities.

Post-merger, Centurion's total balance sheet crossed Rs 10,000 crore, with deposits reaching Rs 8,500 crore. "We are looking at ways of scaling up the SME business, either through partnerships or otherwise," says Bhandari.

Centurion Bank has also pioneered the concept of UBO or universal banking officer. "UBOs are trained to generate leads for multiple products like auto loans, mf schemes or home loans," says Vig. Another novelty: cross-selling among different business segments. Says Executive Director Asokan, who looks after corporate banking: "When we get a corporate customer, we try to sell products like Keyman policies, general insurance, mf schemes, or forex for travel abroad."

HIGH POINTS, LOW POINTS

Sabre's Talwar: The fun begins now The beneficiary of one of nine banking licences doled out way back in 1994 by the Reserve Bank of India, Centurion Bank was promoted by Devendra Ahuja's erstwhile non-banking financial company, 20th Century Finance Corporation (TCFC), in association with Singapore's Keppel Corporation. Besides these two promoters, the equity share capital was also subscribed to by the Asian Development Bank (ADB), Manila, and the International Finance Corporation (IFC), Washington. This new private sector bank decided to focus primarily on corporate banking because of the high yields seen coming in from that sector. In the mid-1990s, corporate business was the hot mantra-with yields of over 3 per cent. And the new-gen, tech-savvy private sector banks were quick to latch on to this lucrative business. A natural hierarchy soon formed, with banks like HDFC concentrating on the high end of the market, while Centurion Bank shifted to the middle end. This state of affairs continued quite comfortably till 1999. That year, promoter Ahuja decided to merge Centurion with TCFC, a move that took the bank's assets to over Rs 3,000 crore. The merger did a few good things for the bank, but unfortunately it did several unpleasant things as well. Among the advantages of the move was that it brought the knowledge of asset-backed finance, especially the retail loan concept, to the bank. Second, the merger increased the branch network by adding 40 marketing offices of TCFC to the 30 existing branches. Then, the bank picked up valuable tips in areas like two-wheeler loans, and commercial vehicles and construction equipment businesses far ahead of its peers, and strengthened its presence in the southern market. In September 1999, Centurion also made a successful Rs 35-crore initial public offering (IPO) at par value. By 2000, the bank's depositor base had crossed the 100,000 mark, with assets reaching Rs 5,000 crore. It also undertook a re-branding exercise, introducing several new products like global debit cards, cash management services and depository services. However, the downside was that Ahuja's TCFC brought with it several issues like accounting problems, disputed tax liabilities and non-performing assets (NPAs). The problems were severe enough to push the bank into a serious downward spiral, what with high provisions and several years of losses to write off. This was a spiral that it found difficult to exit. In fact, in 2003, Centurion Bank's history touched its nadir. Net NPAs on a 180-day basis was 7.5 per cent and capital adequacy was 1.9 per cent. It was around this time that RBI stepped in and advised Ahuja to quit. The rest, as they say, is history.

Given the changing financial landscape, with new foreign players like DBS, Temasek and Newbridge Capital entering through the NBFC route, is Bhandari worried? Not really. He points out the bank's obvious strengths in two-wheeler and commercial vehicle financing. "Two-wheeler financing is tough to do. Operating costs are high and access to low-cost funds is also very difficult," he says. This might hopefully deter quite a few of the new entrants.

For Centurion, at the branch level, the strategy has been to target 'mass' funds, with its core customer base being people with between Rs 8 lakh and Rs 17 lakh in assets. "The idea is to target the hard-core middle class customer," points out Bhandari. This partly explains the kinds of retail segments the bank has chosen to be in. Then, there are new areas to be explored. "Wealth management is a serious opportunity for us, as Indians become financially more mature," says Bhandari.

With 3,500 employees and 2.2 million customers, Centurion Bank is now clearly on a growth trajectory, with several new initiatives underway. Chief among them are an asset reconstruction company, a BPO (business process outsourcing) business and its own credit card. Obviously, the worst is behind it and it's looking at new peaks to conquer.

For a bank with a market capitalisation of Rs 3,000 crore, the only way to go from here is up.