Ms. Juliet Morris of International Banker interviews Mr. Romesh Sobti, Managing Director and CEO of Induslnd Bank.
Today, International Banker is joined by Mr. Romesh Sobti, Managing Director and CEO of Induslnd Bank Limited, to discuss Indian banking reform, the wider challenges facing banks in India and Induslnd’s goal of doubling profit in the next three years. Romesh, welcome to the program.
You have 45 years of experience in the banking sector—in public, in foreign and commercial banking. In terms of the main responsibilities, how different is your current role compared to your previous ones?
Well, you know primary banking doesn’t change across sectors, you know, whether it’s public or private or SME. So the basic banking remains the same. It’s only the approach that changes. You’ll find that in the multinationals, in the private-sector banks. The approach to shareholders, you are accountable. Your approach to employees. You want to create wealth and distribute wealth. The approach to regulators. That is the only difference, of course, for me. This particular assignment for me is different because this is much more entrepreneurial in its scope. And, you know, I worked for multinationals for 25 years, and you had the cookie-cutter approach. You’re one of a hundred countries, and so you are “templated” in a sense. So, the scope for entrepreneurship is limited. This gave us that that sort of open canvas to really play on, and that’s what we have done over the last 10-1/2 years.
So, in terms of the entrepreneurial spirit, what do you feel have been your main contributions to the bank so far?
See, for example, I’ll take one example, see, the use of technology, for instance. If you’re working for a multinational, technology is decided by somebody sitting in Amsterdam or Singapore or wherever. We chose the technology, right. We chose what is best for the bank. Keeping in mind what the country needs and what clients in India need. So, you know, it’s not templated. So you can topicalize, what they say, topicalize technology. That’s just one example of entrepreneurship. The freedom to choose what you think is best. Number one. The number two is the freedom to roll out your beliefs. The fact that, you know, you’ve got 25 years under your belt. You have certain beliefs in your mind that this will work, you know, and those beliefs were rolled out. And we had the freedom and the empowerment to do that, both from the promoters and the board. I think that’s what really comes to my mind on entrepreneurship.
So, a wonderful opportunity that you’ve said you’ve had over the last 10 years. What more is there to do in the medium- to long-term and certainly under your tenure as CEO?
So, you know, we had a pretty diversified and what we call a universal bank per se. But we are limited to banking products, and we certainly want to go beyond banking. And what in India we call para-banking: insurance, life insurance, health insurance, non-life insurance, asset management, brokerage. So we want to move the bank from just being a bank to becoming a conglomerate. We have started certain things. We need regulatory approvals. But in our mission statement, we certainly want para-banking coming. So moving the institution to a conglomerate rather than just being a bank.
And do you do that through acquisitions, or do you do that from within? How does that happen?
Within takes a long time. What we call organic growth takes a long time. Inorganic growth is what I think we have pursued. So, for instance, we earlier in the year, we announced the purchase of India’s largest microfinance company. That was an acquisition. We have acquired a securities company. We have acquired some businesses from a multinational bank, for instance, credit card. So, acquisition seems to be the better way of doing it. While we grow organically on our basic banking.
Overall, I think it’s fair to say that the Indian banking sector has not been having a very good time of it. Mounting bad debts, issues of fraud, regulator censure and so on. As a result, there’s been more call for privatization. Do you think that this would help address these issues? Is that the right way to go?
You know, India has a disproportionate sort of share of banking in the state-owned sector. I mean, everywhere around the world, it is much lower than that. So, the way to go is that way, that the state then relinquishes the big stranglehold it has on banking. That’s one part of it. So, I think that’s the way to go forward. But the issue is, being a private-sector bank doesn’t mean you are a better bank automatically. It doesn’t happen. It’s all about products, processes and people. It’s about how you manage your risk. So, you know, these sorts of things have to be brought in. The fact that you’re a private-sector bank doesn’t mean you are a superior bank. It does not mean that. Of course, you have certain, you are not encumbered by some legacies. For instance, you know, unionism, productivity issues and things like that. But even as a private-sector bank, you could falter. So there are maybe a score of private-sector banks in the country. It doesn’t mean that everybody is gold. So it’s not a tide that lifts all boats. You’ve got to, you’ve got to be different and manage your risk better.
How significant is the ongoing weakness of the Indian rupee affecting business at Induslnd, for example?
You know, on a proprietary basis, we have no exposures per se. Everything is hedged, and the regulator also puts a cap on how much you can carry by way of risk. It’s not what we have in our books, it’s what our customers have in our books, their books. How much of their exposures are un-hedged. So, we worry about the un-hedged exposures of our clients, our corporate clients. And, you know, a couple of our clients tend to punt, right. They all think they can make money that way. And that’s why the regulators also put caps on un-hedged exposures, etc. So, it can affect the business of the bank through the businesses of the clients.
And do you see that changing this state of affairs any time soon, or are you sort of settled in for a longer haul?
As far the rupee is concerned? See, I think that the rupee is finding resistance at the level it is today: 73, 74 rupees. And I think it’s going to be around that, around that figure. There are some uncertainties on oil prices and the trade war, and these always put pressures on the rupee. So the rupee has depreciated. But I think it’s finding a fair value even at the level it is at: 73, 74.
The government has unleashed a number of institutional reforms: a monetary-policy committee, GST, the Real Estate Act, the Insolvency Act and various others. Do you think that these are going to make a real difference? And if so, how are they going to benefit the bank and the banking sector?
So, I personally feel that these are structural changes, they are transformative, and they’re irreversible. And some of these are the best thing that happened to banking, for instance. I’ll take one example of the Insolvency and Bankruptcy Code that was introduced. So, one of the banes of Indian banking was, How do you get your money back from the defaulting borrowers, including rogues who ran away with the money? They beat the system, the legal system. The legal system gave them a 20-year life to beat the system. So, you never got your money back. This is the best legislation that has been introduced. It’s called the Insolvency and Bankruptcy Code. It’s a very well-drafted legislation. And what it means is that if you default, you could lose your company in six months’ time. And not linger it over 20 years. Yeah. So, the whole issue about, you know, industries becoming bankrupt and industries never becoming bankrupt, that’s changing. And I think that’s for the good. That legislation is now being tested by poor losers. But I think in a year’s time, that will be put to rest. And this will move very, very smoothly. We’re already seeing the benefits of that. It’s the best thing that happened to Indian banking in terms of reforms.
So, do you feel that the outlook is positive for the banking sector?
You see, these events, for instance, this is one of them. I received the Insolvency and Bankruptcy Code. The monetary-policy committee that was set up which clearly defined the role of the regulator in terms of fighting inflation, etc. Otherwise there were always these pushes and pulls between government and the regulator, right. Which was not good for banking. There are other elements of it. For instance, demonetization is not being spoken about, and I’ve also always considered demonetization as a one-time reform. Because it brings out ownership of money, which was always never disclosed in India. That benefits banking. Money flows into the banking system; it has nowhere else to go, you know. So, any reform that affects the economy affects banking. Because the economy runs through the banking system. It funnels through the banking system. So, they are good, I think, in the long-term. Even in the medium-term, I think they are good reforms.
Impact investing and ESG investment are becoming popular globally. Do you feel that your bank is currently doing enough to number one, minimize its environmental impact? And also, do you have much presence in these areas?
These areas are very close to our hearts. I mean, and we generally believe in them. It’s not the fad-ism that sort of drives us. So, you know, we are the only bank in the country which has an integrated sustainability report together with the annual report. We have integrated sustainability with our system. We are about to announce and vocalize and articulate especially our goals on ESG, which is environmental, social and governance. We will announce to the market that these are our targets. So, I‘ll give you an example. If you look at the green lending and impact lending, today it’s 1 percent of our book, loan book, is green. By 2020, we are saying it will become 8 percent. So, we are going to articulate targets so that the market can then audit us on those targets.
Why not 18 percent or 28 percent? Why only 8 percent?
You see, because the rest of the bank is also growing. The 1 percent today is this, the 8 percent tomorrow is going to be this. That’s an absolute figure that will be very large; as a percentage, it will be 8 percent. I’ll give you another example. Livelihood financing, right, is also very close, it’s a theme that is close to the bank. We are saying that by March 2020, 45 percent of our loan book will be for livelihood creation. Right. We already do that, and we are working towards it. For instance, we acquired the microfinance company, India’s largest microfinance company. We suddenly bring in 10 million poor people. So, we want to be a frontrunner in creating massive financial inclusion.
Yes, so these initiatives basically are to help people in rural areas.
Also, as well. Financial inclusion has got to be more in rural India than urban. Urban India has seen much more prosperity, I would say. Rural India has not seen banking per se. ESG goals will be vocalized. I’ll give you some more examples. The thing what we do mostly in rural India. For instance, you know, digital literacy is also one of the things. 200,000 village entrepreneurs, we have actually put through our digital-literacy program. Education to the poor—children, for instance. We go in deep in villages. So, we have a lot of focus on rural India, you know, because that’s where focus has not been sort of given so far.
And potentially, I assume, you know, I mean you’re doing it because ultimately it’s good for business, apart from anything else.
Exactly, of course. Sustainable business. I mean, sustainable business means your sustainability…the definitions that certainly are in our minds is that doing business today so that future generations also live the way we live. You know, so you don’t destroy.
Last year, the bank announced a merger with Bharat Financial Inclusion through a composite scheme of arrangement to, and I quote here, “bring India to Bharat and create a stronger and more sustainable platform for financial inclusion”. How’s it going? Is it achieving its ambitions?
So, you know, it’s a legal process of merger. We are in the last legs of the merger, and we hope that by December or January at the latest, the merger happens. And through that acquisition, we fulfill our ambitions of being a frontrunner in rural India and financial inclusion. What Bharat brings to us in our book is 10 million customers, 100,000 villages and about 16,000 people. We have been struggling with how to address rural India and how to bring credit to the poor. This acquisition gives us that big platform, you know. In one go, we suddenly go to one-sixth of India, 100,000 villages out of 600,000 villages. So, we are…apart from that, within the bank, also we do financial inclusion. I mean, this is one acquisition, but we have 2.7 million customers already. Bharat will bring in another 10 million customers. You’ve got 30 million customers in rural India. And I think through that, we will fulfill our ambition of addressing the new frontier; rural India is the new frontier.
Induslnd has embarked on a number of innovative issues around customer experience, fintech partnerships and the use of biometrics in areas such as fingerprint banking. How did these, do you believe, help differentiate the bank? How important are they to the bank?
The differentiation one wants to create is really customer convenience. Convenience to the customer has three or four aspects to it, you know. The number one to me is to be seamless. You must have a seamless experience across the bank. It has to be easy, really fast; it’s got to be transparent. We’ve always used technology to create that convenience for customers. And the second element around this is the client-experience aspect. So, one is servicing customers; the other is giving an experience to customers. And we want to be where…we started a project one and a half years ago together with McKinsey, which goes across 25,000 people, and saying, client first. How do you make a difference to the client? And we selected convenience as a platform. And we see that the complaints that come are actually around inconvenience. People generally don’t like going into banks. You like going into a retail shop. You will window shop. You will never window shop at a bank. You zip across a bank. Why? Because it’s cumbersome. Can you change that? So that’s an ambition.
On that note of innovation, what are your views, therefore, on things like blockchain, which is a real buzzword it seems to me at the moment? Artificial intelligence and robotics, there’s also a lot of talk about. Are you going to go down that sort of a route?
Yes. I mean, they are an option, technologies. We want to be a frontrunner in adoption of technologies. But, what do you use technology for? We’ve always said, technology we use to find customers, to serve customers and to engage customers. So, whether it’s the technology we already use today or it’s the blockchain or artificial intelligence or robotics or whatever, it will be used for this cause. Find, serve, engage customers.
What sort of impact will that have, for example, for your employees in the bank? Because a lot of people I know worry when they hear mention of this kind of thing, that robots are going to be taking over our jobs. I mean, is that a possibility?
No, see, what you are, what you have to communicate, and people are understanding that—we’ve done workshops for 25,000 people—is that we are upgrading your skills, not replacing you. You’ll do other skilled jobs. So that even if robots come in, you will do something more evolved intellectually. And it’s not a question of a robot replacing you. For instance, robots today will answer queries but are not capable of doing lateral thinking on a problem that a customer brings. Simple queries can be. But they will evolve. So what we are saying is that we want to make our people digitally literate, and we’ve done, across 25,000 people, we’ve done this program to make them digitally literate.
Your mission statement, the bank’s mission statement, has declared an aim to double profits, clients and branches within three years. Doable, or a bit pie in the sky?
So, the last 10 years we have doubled every three years. Three, three, three, we keep doubling. So the issue is, if you look at it in perspective, even today after doubling every three years for nine years, we are only one and a half percent of the market, right. So, let’s put this in perspective. If you can take your market share to 2-1/2 or 3 percent, right, then you are a meaningful player in the market. So, you’re coming off a smaller base, you know, so it sort of makes it very grand to say, you’ve doubled. But we are quite confident that even in this three-year plan, which ends in March 2020, we are on our way to doubling. Doubling customers, doubling our branch network, doubling our profit. So, it’s a growing market, you know, it’s not a stagnant market. If it’s a stagnant market, you worry, because you’ve just taken market share from somebody else. Here, you’re not taking market share. You’re taking a piece of the new pie.
So, when do you anticipate potentially hitting the magic 3 percent to become that serious bank?
Three percent market share…it’s taken us 10 years to move from 1/2 percent to 1-1/2 percent. I think it will take another five years to move from 1-1/2 percent to 3, because banking is consolidating. And no new opportunities are coming.
On a slightly separate note, all businesses want to attract the brightest and best talent. How do you do that at Induslnd? And, beyond the obvious kind of financial incentives, how do you maintain employee engagement?
So, you know, financials mean a lot. Everybody comes to work to improve net worth, to look after their families, and the future. That’s one thing. So, that’s a given. But my experience over these 45 years is that the biggest stickiness comes out of growth. People want to work for a growth-oriented organization, because the learning experience in a growing organization is massive. And the agility and the rapidity with which people go up the learning curve that itself is the biggest, stickiest point. We’ve been giving growth to our people, right; so, people have come in at this level and grown to this level. And that creates the stickiness, I think. So, loyalty is really a function of: “What does it mean to me?” also. Right. And, “Am I evolving as a person and as a manager? Apart from the fact that I make money. I’ve got to make more money”, and they think like that. But growth is the biggest, stickiest factor, stickiness factor, and that’s how I think we’ve been able to attract talent and retain talent.
Creating opportunities fundamentally.
Correct. And giving them much more. If you are a very evolved organization and a very deep hierarchy, the movements are very, very small. But if you’re a very shallow hierarchy, and you’re growing fast, people also prosper fast.
And amongst that, I would imagine, we’ve touched on innovation, I would imagine that there is quite a lot of emphasis on training opportunities in that kind of an area within the bank.
Absolutely. Training is the critical part of this thing. I mean, the last financial year, we spent a million training man-hours on our people. Forty percent of those were on skill aggrandization. That itself is a stickiness factor. “What do you do for me? Am I doing the same routine job that I came in for? Did you upgrade my skills?” So, we have spent a lot of man-hours on upgrading the skills of our people.
You have strong market positions. Albeit, you are a relatively small player in the industry. You’ve got strong market positions in a number of different areas. Particularly, I’m thinking of vehicle financing. What are the emerging domains, and where do you see the bank focusing over the longer term?
So, you know, when we do our three-year plans, we come up with a slogan, every three years we come up with a slogan. The slogan for this three-year plan is the Four Ds. So, it means digitized to diversify to differentiate and create domain leadership. So, domains is what you mentioned. So, you know, we realized that just being big is not enough. Being leaders in certain domains is actually a better proposition. So, it’s not a catch-up game with the big boys and girls, right. So, we said, “O.K., we choose domains where nobody can touch us.” So, the domain of vehicle financing is a legacy domain. Everything on wheels we finance. And we are the number one and the number two. O.K. Then we picked the domain of the diamond-financing businesses. And diamond financing we acquired from our previous bank, ABN AMRO. Today, we are the number two financier of the diamond industry globally. And number one in India. And nobody can touch us there. The third domain is microfinance. And the acquisition of auto finance adds to that. The fourth domain is going to be wealth management. And it’s differentiated. It’s not banking the wealthy; it’s banking the well-off. And there’s a difference between the two, as you know. So, banking the well-off is a niche, I think, that there’s a vacuum there. That is ready to launch, I think. The fifth domain is in our minds. It’s not been articulated yet. But before I go, leave the bank, I think the fifth domain would be left with us. So, domain leadership is close to our mission. It’s our way of making a difference.
So, you’re sounding pretty positive and pretty optimistic. You’re confident the bank has a good future?
Absolutely. Otherwise, why are we here? We are here to give it a better future. And we’ve always said that the future is going to be brighter than the past. And people focus on the 10 years of, you know, compounded annual growth rate of 25 percent. We are saying that’s history. Let’s look at the future, and what can we do to ensure that there’s continuity of thought and action. There’s continuity of the determination with which you execute your strategy. And there’s the other theme that the management team believes that any strategy is only as good as the determination with which you execute it. And people ask us, “What did you do differently?” Yeah, so we also strategize like everybody else, but we execute every day. And certain businesses that we run are daily cash-flow businesses; you don’t relax ‘till the end of the month. So, I think we are pretty confident that we are on sound footing. The rural sort of areas that we are now getting into will give us the growth impetus. And hopefully the progress we made over the past will be bettered by the progress in the future.
Romesh, thank you very much.