India banking: Data show RBL the way

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By:
Elliot Wilson
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RBL Bank has been transformed over the last decade, from parochial local lender to a second-tier bank with genuine national scale. Its investment in digital and data analytics, and its focus on financial inclusion, suggests it isn’t finished yet.

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When Vishwavir Ahuja and Rajeev Ahuja (the two men are not related) cast around for new challenges 10 years ago, the world they knew was in turmoil. India had skirted the worst of the global financial crisis, but for many of Mumbai’s seasoned, more international bankers, it was a different story.

Vishwavir was a case in point. He had spent 28 years at Bank of America, rising through the ranks to become country head and CEO in 2001. But his life was upended when his employer bought Merrill Lynch and by the ongoing fallout from the global financial crisis.

Rajeev faced his own moment of reckoning. A veteran banker himself, he had held senior positions in India, Hong Kong and Singapore. Citi – the bank where he had worked since 2004, heading up investor sales for south Asia and establishing the US lender’s onshore debt capital markets business – had to be bailed out in the crisis. He wasn’t sure whether to stay and ride out the storm with the US lender or look for a job elsewhere.

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Rajeev Ahuja, RBL

As the two vacillated over their futures, fate intervened. While Vishwavir was chatting with a friend, Ratnakar Bank came up in conversation. Ratnakar had been around for 65 years, but in financial terms it had never really got out of second gear. 

Vishwavir considered it a parochial bank located 250 kilometres south of Mumbai, serving a mix of “traders, small businessmen and farmers” in the cities of Sangli and Kolhapur. But he also saw enough to believe in its future, and knew there was enough room in India for another well-run lender.

The bank was not in financial trouble, but its shareholders and board wanted to shake things up and bring in new faces and capital. Some bankers and investors had expected Ratnakar to be merged with micro-finance provider Basix. Others predicted it would be bought by a local real estate firm.

The Reserve Bank of India, wary of backdoor takeovers by non-finance companies, nixed that idea. However, the bank and regulator needed a new chief executive at the helm because the incumbent, Subhash Kutte, was approaching the end of his term.

Vishwavir’s name and status fitted the bill and, in late 2010, he took what he describes as the “big leap” of his career.

The new chief executive assembled a like-minded team – mostly veteran bankers weary of the investment banking rat-race and keen for a change – and got to work.

Rajeev joined as executive director in charge of retail banking, transaction banking and financial inclusion. R. Gurumurthy came from Standard Chartered to oversee corporate and institutional banking, while Andrew Gracias arrived to oversee fixed income, FX, trading and sales, having cut his teeth at UBS and Bank of America Merrill Lynch. Other heads joined from local lenders Yes Bank and ICICI Bank, as well as from Royal Bank of Scotland.

Rajeev was bombarded with messages after signing up, some wishing him well, but others wondering if he had lost his marbles.

“My old friends at Citi in Singapore ribbed me about my choice,” he says, when we meet at the lender’s main offices in the central Mumbai district of Lower Parel.

“I could have done anything – gone into private equity, stayed at Citi, bootstrapped tech firms, or set up a consulting firm. Yet here I was at this tiny privately owned bank.”

At first, the new team struggled to find its footing.

“We were fearful of being too imposing,” Rajeev says. “I’d never worked in local banking, in agri-finance. It was a very different experience, sitting down with a branch manager and asking what we could do for him. Typically he’d reply: ‘Better office furniture would be nice, plus extra travel money to visit my clients’. And Ratnakar’s people were all just really nice, down-to-earth, welcoming people.”

Which was great, but the new team was there to do a job: to turn around a creaky lender with a leaky balance sheet. It had fewer than 100 branches, most of them in its home province of Maharashtra. In the financial year to the end of March 2010, it reported a net profit of $2.86 million, while total deposits came to just $238 million.

The team knew they had a job on their hands. Previous management teams had already tried – and failed – several times to transform Ratnakar from the inside.

“The bank had legacy issues, financial difficulties and union problems. Technology was outdated and everything was done manually,” says Vishwavir.

It was, adds Rajeev, run “pretty much like the small local bank it was. We realized the bank hadn’t really developed – there was no marketing, no brand, no sense of the customer’s view of it. Like a lot of these old, private-sector banks, it had simply stopped evolving and become a local community bank. There’s nothing wrong with what they were doing, but in order to give it scale, we had to give the system a jolt.”

Culture shift

That required money and a seismic shift in culture. The first happened quite swiftly. Within six months, Ratnakar secured $150 million in equity financing from new investors – including the UK’s CDC Group, the IFC, local lender HDFC Bank and Palo Alto-based Norwest Venture Partners – which trebled its capital base.

“We set out to run the bank on professional lines with strong management, an independent board and no outside investor interest,” Rajeev says.

Internally, it wasn’t a simple case of a new broom sweeping away dead wood. “Banking is a cultural experience, and we had 700 staff from the bank’s old days,” Rajeev adds. “We had to integrate them and convince them to buy into the new culture, or it would have hindered us. We prioritized paying wages that were backdated or delayed or overhanging, and that really helped people to cooperate, as did the employee stock ownership plan that we announced on day one.”

At first, the bank flew under the radar. It was unlisted, allowing it to undergo what the executive director describes as a “slow revolution”, putting the building blocks in place, piece by careful piece.

The new investors, while expectant, were patient, giving management time to build foundations, then to develop stability and scale.

Each year, the bank trumpeted a new product, platform or strategy shift. In 2011, it unveiled a financial inclusion plan, years before many of its peers. Cellphone use was soaring, while a new digital identity scheme, Aadhaar, had been announced but not fully launched. Ratnakar’s top team could see what it meant: the potential to reach millions of unbanked families, digitally and cost-effectively.

It now has 850 dedicated microfinance branches, whereas it had none in 2010, and micro-loans made up 13% of the bank’s total book at the end of March 2018. In June, the lender raised its stake in Mumbai-based micro-credit provider Swadhaar Finserve to 100%, from 60.48%, renaming the expanded division RBL FinServe.

It now has 940,000 customers, with combined assets under management of Rs25 billion ($355 million), and has partnered with non-bank finance company Bajaj Finserv and Bangalore fintech MoneyTap to issue co-branded credit cards.

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Any hopes Ratnakar had of remaining inconspicuous were dashed in 2013, when it bought Royal Bank of Scotland’s Indian credit cards and mortgage business for an undisclosed fee. Overnight, the tiny lender acquired a portfolio that included 90,000 credit cards and 20,000 commercial loans. The executive director laughs when he recalls events surrounding the deal.

“When we reached out to pitch RBS,” says Rajeev, “the guy we called said: ‘Look, I have no idea who Ratnakar is, but if you’re coming to Edinburgh, give me a shout’. He had no idea who we were.”

But the deal, as he is happy to admit, “gave us a public face as well a credit card platform. It catapulted us into the limelight. Suddenly, people were saying: ‘Hey, this bank out of Kolhapur, this small place, has bought a piece of RBS’. To be honest, we lucked out with that piece of business. A year after we bought those assets, the credit cards business really began to take off, allowing us to issue co-branded cards, and to cross-sell and integrate our cards business into our wider offerings.”

The next two big events were no less important.

In 2014, Ratnakar rebranded itself as RBL Bank and relocated its headquarters to Mumbai. Two years after that, it completed its IPO on Mumbai’s twin bourses – the first stock sale by a privately owned Indian lender in more than a decade.

The listing raised $182 million, valuing the lender at $1.25 billion and chief executive Vishwavir Ahuja’s 2.7% stake at a little over $30 million. The shares closed at Rs595.5 on March 1, up 25% over the previous year and 165% higher than its issue price.

Future plans

It hasn’t all been plain sailing. Its 2016 stock sale might have attracted bids for nearly 70 times the number of shares on offer, but the process dragged on “far longer than anticipated”, Rajeev admits. “It was all set to happen in 2015, and we had staff who’d planned how to spend the proceeds of their vesting shares. But Sebi [the securities regulator] kept coming back with questions, and we had rival banks trying to get our customers and spreading rumours about our checks and balances. And it was all happening at a time when the Chinese economy was stalling, people were pulling capital out of emerging markets and we were stretching ourselves too thin.”

There was another fraught episode when the bank took a credit loss it couldn’t really afford.

“We gave some money to a company who we didn’t know,” says Rajeev, “but we went by their rating, and within two years the whole thing turned out to be a big fraud, not just for us but for the entire banking system.”


We are very aware of what we will do and what we won’t do. We aren’t looking to be the biggest bank [in India], but we will continue to grow each year, and to get better at what we do
 - Rajeev Ahuja, RBL

So, what lies ahead? The executive director takes a deep breath before plunging on. He is intensely well informed about the bank’s set-up and future strategy – as he should be, given that he is also responsible for investor relations, internal capital-raising and developing new businesses and partnerships.

He starts with the simple stuff.

“We are very aware of what we will do and what we won’t do,” Rajeev says. “We aren’t looking to be the biggest bank [in India], but we will continue to grow each year, and to get better at what we do. We are staying firmly away from problem areas like project finance, and focusing on building a franchise with the legs to run for the next 20 or 30 years.”

Key to the bank’s future are wholesale banking, financial inclusion and credit cards, areas where the bank believes it has clear advantages and is punching above its weight.

RBL is “one of the fastest-growing credit cards businesses in the banking space,” says Vishwavir. “We are the number-five provider today, both in terms of spend per card and net new cards issued.”

Despite its size, digital is everything.

Rajeev adds: “Our investment in technology started early and still pervades everything we do. We still invest a lot in data analytics, experimenting, building new models. That will really pay off for us over the next three to four years. And over the next seven years, because of consumer aspirations and a rising middle class, not to mention Aadhaar and the single goods and services tax [GST], you are going to see a reconfiguring of financial services.”

He points to the examples of UK-based firms like peer-to-peer lending marketplace Funding Circle and mobile-only challenger outfit Starling Bank.

“Many of those kinds of services are already seeping into India,” Rajeev adds. “We play a big role in fintech – and have done since 2014, when we started building an API [application programme interface] banking platform and young firms started talking to us. We are not afraid of experimenting and enduring modest failures.

“We are always looking for new services that can help us to move the needle and differentiate ourselves in the long run,” he adds. “No one is extra special as a bank. Take HDFC or Axis or Kotak Mahindra”, three of India’s best private-sector lenders. “If you strip away all the propaganda and the marketing, they are [just] retail and commercial banks.”

National provider

RBL Bank has come a long way in a very short period of time. Since the start of the decade, it has more than doubled its number of branches to 201, across 16 states and territories. A once-local bank has become a national provider of credit and banking services to everyone from poor farmers to big companies. That it has grown consistently and well is down to good planning.

Every five years, it draws up a new ‘Vision’ document. The current one, issued in the wake of its September 2016 IPO, set out, among other things, to cut its cost-to-income ratio to between 51% and 52% by the end of 2020 (it was 58.6% when the target was set in 2016, and was down to 51.6% by the end of September 2018).

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The next, set to be unveiled later this year, will take the bank through to 2025.

Over that period, it has been transformed from a well-meaning but third-tier local outfit into a second-tier national lender with space to grow. Its market capitalization valued it at Rs254 billion on March 1 2019, behind comparable lenders such as Yes Bank (Rs549 billion) and well behind the likes of Kotak Mahindra Bank (Rs2.35 trillion) and HDFC Bank (Rs5.66 trillion). It reported a net profit of $96 million in the Indian financial year to the end of March 2018, up 42% year on year. Yes Bank by contrast made a net profit of $636 million in 2017/18, up 26% over the previous year. But the mere fact that RBL Bank is included in this discussion shows how far it has come.

RBL’s executive director is already looking ahead.

“We are well capitalized, well run, well managed, and our balance sheet is growing by north of 35% a year,” Rajeev says. “Over the next five to 10 years, India’s banks will begin to look very different, thanks to GST and the advent of cheap smartphones. Over that period, we will increase our scale geographically, but maintain our core principles of agility, working with good partners, and good corporate governance.”

Rajeev remembers how, shortly after joining RBL Bank, he was frequently asked what he hoped his new employer could become.

“We genuinely felt we could build it into a high-quality institution, so always my reply was that we wanted to transform RBL into a mini-HDFC Bank. When I said that, people laughed.”

They aren’t laughing any more.