Five years ago, when R. Subramaniakumar landed at Chennai-based Indian Overseas Bank (IOB), the public sector lender was fighting multiple battles: deteriorating asset quality; over-dependence on bulk deposits with a concentration of risky corporate loans; and low employee morale. But he was unfazed. In his short stint as MD & CEO, he streamlined the HR function, re-built the risk management team, corrected and created some 85 policies, kicked off a clean-up of the books, and focussed on building a diversified business model. Subramaniakumar retired from IOB in June 2019 and the mid-sized lender has started reaping the benefits now. That’s not the only feather in his cap. Earlier, he was instrumental in laying the groundwork for public sector lender Indian Bank’s retail-, agri- and MSME expansion. More recently, Subramaniakumar was the administrator of the beleaguered Dewan Housing Finance Corporation Ltd (DHFL), which was sold to the Piramal Group. The veteran public sector banker has moved on to his next demanding role—as the MD & CEO of private sector lender RBL Bank. “I’m capable of fitting myself into the role assigned to me. The bank is good and doing well. I should take it to the top,” the 63-year-old says.
Analysts, however, are not gushing over the Reserve Bank of India’s (RBI) choice to head RBL. They point to earlier instances of former public sector bankers being appointed heads of financial institutions that have a track record of poor asset quality and corporate governance issues. For instance, the entry of former RBI Deputy Governor R. Gandhi on YES Bank’s board unearthed more non-performing assets (NPA) on its books. Similarly, a year after the RBI appointed its nominee on the board of Lakshmi Vilas Bank, the private sector lender was superseded by the regulator. “Hence, this new development raises many questions,” says Jitendra Upadhyay, Senior Research Analyst at brokerage firm Bonanza Wealth Management. In a report titled ‘More questions than answers’, CLSA, a foreign brokerage firm present in India, notes that “the CEO’s appointment raises more questions, including the continuity of the existing top leadership at the bank”. The bank’s stock, which is yet to recover from the asset quality and leadership shock it received six months ago with the sudden exit of then MD & CEO Vishwavir Ahuja, got another jolt from the RBI’s move. The battered stock tanked further—from Rs 113 to Rs 76 per share—after the appointment.
Subramaniakumar has stellar credentials, but he is on the unfamiliar terrain of setting right an old private bank. Can he rebuild RBL Bank?
The Genesis of the Crisis
Ahuja, who used to head Bank of America in India, built RBL brick by brick. When he took charge in 2010, it had a balance sheet size of Rs 3,229 crore, loan book of Rs 1,905 crore and deposits of Rs 2,042 crore. But profit was only Rs 12.33 crore. By 2020-21, the balance sheet had grown 31 times to top Rs 1 lakh crore, loans and advances by 30 times to Rs 58,623 crore, deposits by 35 times to Rs 72,121 crore, and net profit by 41 times to Rs 508 crore. It was a story of transformation, growth, scale, and profitability.
But it came at a cost. “By design, the bank had a high-risk model of lending as it was targeting a higher return on equity,” says a research analyst on condition of anonymity. RBL didn’t focus on building retail liabilities (low-cost current account and savings account, or CASA) or secured assets, especially for mortgages and vehicle loans. Instead, it chased bulk deposits that are easier to get by offering higher interest rates, and offered high-risk, high-return, unsecured loans. “RBL had a higher cost of funds so it resorted to high-yielding, risky assets,” the analyst reasons. RBL largely provided short-term loans with high interest rates to mid-sized and stressed companies for working capital needs.
Over the years, the share of wholesale and retail advances tilted towards corporate loans, with 60 per cent exposure to wholesale banking by FY19. Unsecured loans, such as credit cards and microloans, rose to almost a third of advances. This skewed model, with a high proportion of risky, unsecured loans, was a recipe for disaster in a down cycle. But the wholesale banking strategy initially paid rich dividends. RBL debuted on the bourses in mid-2016, and in less than three years, its shares tripled in value to touch a high of Rs 700. That’s when the party ended.
The years 2018 and 2019 were challenging ones for business. This was because of the culmination of a series of events such as demonetisation, GST and the Insolvency and Bankruptcy Code (IBC). The first big jolt to the financial system came from the debacle at infra financing entity IL&FS in 2018. Following that, defaults in over-leveraged firms such as DHFL, Jet Airways, Cox & Kings and Café Coffee Day surfaced. In July 2019, RBL, too, disclosed half-a-dozen stressed loans worth Rs 1,000 crore, with exposure to firms including Café Coffee Day and the Essel Group. It hinted that its gross NPAs would top 2 per cent of total advances, after staying below 1.50 per cent for seven to eight years. The market was surprised by the disclosure, wondering if the RBI had a role to play or RBL was being proactive.
Four months later, RBL drew up a new list of Rs 800 crore in stressed loans. The market speculated if there was more pain hidden in the corporate accounts that now accounted for more than half its total advances of over Rs 50,000 crore. RBL was worried about its exposure to the lowest investment-grade (BBB) and below-rated corporates. Subsequently, its NPAs jumped to 3.62 per cent in FY20 and to 4.34 per cent in FY21. As the economic slowdown and liquidity crunch triggered RBL’s slide, the RBI closely monitored the bank’s stability. RBL’s deposits slipped from Rs 58,394 crore in FY19 to Rs 57,812 crore in FY20, signalling depositors’ angst. That’s the last thing a regulator wants to see in a bank.
The Last Straw
By that time, though, RBL had started becoming conservative. Ahuja reduced the bank’s exposure to risky corporate loans and built up low-cost deposits with retail participation. By December 2019, RBL had also raised Rs 2,701 crore from several global funds, which helped improve its capital adequacy ratio to 16.08 per cent from 3.08 per cent a year ago. Then the pandemic struck.
The first wave of Covid-19 led to stress in RBL’s retail portfolio of credit cards and microloans. But the impact was mitigated by the government’s six-month moratorium for borrowers, followed by a one-time restructuring. By August 2020, the bank had mobilised additional capital of more than Rs 1,500 crore. But the falling stock price—from Rs 700 in mid-2019 to close 2021 at about Rs 127—meant the funds came with higher equity dilution. Plus, RBL was sitting on a liquidity coverage ratio of over 150 per cent, much higher than the minimum requirement of 100 per cent. This was to meet deposit withdrawal requirements and other short-term fund outflows. The bank had also started increasing its NPA provisioning coverage ratio.
The second wave of Covid-19 accelerated the stress in the retail, MSMEs and rural & microfinance business—the core of RBL’s retail portfolio. And there was no moratorium this time around. Retail assets saw higher slippages than corporate ones in 2021. The bank also restructured its stressed assets. The stressed book, which includes gross NPAs plus the restructured assets, reached more than 9 per cent of total advances by December 2021.
Ahuja was in a fix as RBL’s business mix was skewed towards an unsecured portfolio, with a third of its advances locked in credit cards, personal loans, microloans, etc. The credit card business alone was 22 per cent of its book, although it was a major contributor to its profitability. The bank did start cross-selling to credit card customers, but that was not easy to do during the pandemic. While the tough environment impacted the bank, its risky portfolio selection was also to blame. It was then that the RBI appointed its Chief General Manager Yogesh Dayal as an additional director on RBL’s board in December 2021. The message was loud and clear. Ahuja, the man who had turned around RBL and also presided over its fall, stepped down on Christmas Day, citing health reasons. Sources suggest that the bank’s board was lobbying the RBI to extend Ahuja’s term beyond June 2022. Caught off guard, they appointed Executive Director Rajeev Ahuja as interim MD & CEO. The stage, thus, was set for Subramaniakumar’s entry.
Subramaniakumar has had a lifetime’s training to cope with challenging situations. Punjab National Bank (PNB), where he began his journey—and stayed on for three and a half decades—forged his banking acumen. He worked his way through every department, including rural, branches, treasury, currency, credit, and corporate. The grooming and grilling, he explains, “gave me a broad background and profound grasp of the market”.
At PNB, Subramaniakumar was once assigned to the Karnataka region, which was struggling then. “You have exposure in all facets of banking. Let’s see how you perform there,” K.R. Kamath, who was chairman of PNB during 2009 to 2014, had told him. Subramaniakumar didn’t disappoint—he helped the region advance to the top 10 in terms of branch profitability in the group. “No individual can do it [alone], but a team can deliver. If you are able to make the team relish this dream… I’m pretty confident that we will be able to do it,” he says. That also gives a glimpse into his leadership style of inclusiveness. Since his RBL appointment, he has been working alongside Rajeev Ahuja, who was also a candidate for the top job. Subramaniakumar believes that building a sustainable business model takes time. “Everything cannot happen like [magician] P.C. Sorcar pulling a rabbit out of a hat,” he says.
He is also not very perturbed by RBL’s stock price crash. After all, he’s dealt with something similar earlier. When he joined Indian Bank as ED in 2016, he found its share price—hovering around Rs 70-80 then—didn’t have much traction in the market. To fix this, insiders say Subramaniakumar brainstormed with then MD & CEO M.K. Jain (now RBI Deputy Governor) and ED A.S. Rajeev (now MD & CEO of Bank of Maharashtra). The trio decided to convey the growth story of retail, agri and MSME to the market. People in Indian Bank say the home loan vertical was scaled up using technology and creating a process-driven approach. Once the template was in place, Subramaniakumar asked each of the 2,000-odd branches to underwrite a minimum number of home, car and consumer loans. He also created a cluster-based approach for MSMEs by sanctioning loans faster and giving special concessions, which not only brought low-cost current accounts but also additional high-yielding business. The domestic analysts’ community had suggested reaching out to investors in Singapore and Hong Kong and Subramaniakumar was tasked by the board to inform prospective investors about the turnaround story. In eight months, the share price went up to Rs 150. The price reflected the business fundamentals, and Subramaniakumar had laid the foundation for growth.
Similarly, when he was appointed MD & CEO of IOB, the first thing he did was to give the bank direction. “The immediate emphasis was on operating profit,” he explains. He increased CASA from 20 per cent to 40 per cent, and instructed branch managers to open at least five savings accounts. The market and business-oriented branches were given targets for current accounts. Twenty-five per cent of the 3,000-odd branches were losing money. “I reached out to all 750,” he says. Over a three-year period, he reduced the loss-making branches to 6 per cent by creating a turnaround strategy for each of them. It also had a high cost to income ratio of 65 per cent, which he brought down to 40 per cent.
He focussed on reducing each branch’s spend on renting premises—one of the biggest expenses to operate a branch. Historically, nobody negotiates terms of a contract on a regular basis. He opened the door for negotiations by inviting open bids from the market. Large branches were asked to either shift to smaller premises or negotiate lower rents. These measures resulted in reduced expenses. In addition, the retail assets with new products like jewellery loans, etc., helped improve its share from 40-45 per cent to 60-65 per cent of the loan book.
His last assignment was as the RBI-appointed administrator of DHFL. The ailing housing finance firm had no CEO, senior management, CFO or company secretary. In fact, there was no precedent of a financial services company going through the IBC process. The challenge was to keep DHFL afloat when shareholders, customers, borrowers, employees and other people were abandoning it. His first big challenge was to bring a new team on board and he succeeded within 10 days by personally calling up people to convince them to join him. He also assured employees that there wouldn’t be any salary cuts or layoffs.
New CEO, New Strategy
Let’s get back to Subramaniakumar’s task at hand. So far, the RBI has publicly assured depositors and other stakeholders that RBL is financially stable. The bank currently enjoys a comfortable capital adequacy ratio of 16.33 per cent for business growth, a very comfortable NPA provisioning ratio of 76.6 per cent and a healthy liquidity coverage ratio of 153 per cent to meet any sudden fund outflows. “In FY22, the bank accelerated provisioning, sharply improving the provisioning coverage ratio, and ended the year adequately provided on both wholesale and retail portfolios, with the provisioning coverage reflecting the expected loss on the NPA and the restructured book,” says ED Rajeev Ahuja.
Subramaniakumar lists out the bank’s strengths in certain areas, like human resources. “The bank has well-positioned itself in the market,” he says, adding, “It doesn’t happen without people, products, and processes,” RBL has also taken a leadership position in niche areas like microfinance and credit cards. “I want to leverage my expertise of having been in the banking industry for a long time.” RBL has a good platform, a niche area of strength, low NPAs, and growth capital. “I will leverage its strengths and make it much stronger,” he says.
The new MD & CEO is talking about RBL 2.0 that will focus on increasing profitability. “There will be diversification and broad-basing of the business,” he says, adding that risks will also come down. Currently, 52 per cent of RBL’s loan book is in corporate and the balance in retail. Clearly, there will be some tightening in the underwriting processes. When asked, he is a bit guarded. “When I had a walkthrough in the morning, I saw a fairly large number of monitoring teams, especially credit monitoring teams, which have been established. Having established a credit monitoring team, they [RBL] must be setting up the process of monitoring it. They would have definitely learnt from that particular incident [when there was a sudden spike in stressed loans] in the past,” he says, adding that there are plenty of opportunities in retail banking.
“The new management will have to bring stability and improve compliance and risk management to bring credibility into the balance sheet. Post successful implementation… the bank could be on a growth path in two to three years,” says Arun Malhotra, Portfolio Manager and Partner at CapGrow Capital.
The growth in credit cards and microfinance will continue. “The bank’s key profit comes from the credit card and microfinance business. Any change to this loan mix will hurt the near-term prospects on growth and profitability,” says Bonanza’s Upadhyay. “I also want them to diversify and grow in other areas that they have guided, like housing, vehicles, cars and rural loans.”
“On a three-year basis, we do see RBL growing closer to 20 per cent on a compounded basis across all segments,” Rajeev Ahuja said during a recent analyst call. “In wholesale, the focus will continue to be adding more clients in the corporate, mid-market supply chain, government and NBFC and new economy areas.”
At the top of the MD & CEO’s agenda is improvement in the CASA share. “When I talk about liability, I refer to the base level retail customer growth. That is the focus… That is where the technology-related products will be introduced,” he says. The man who started his career as the in-charge of an extension counter in PNB is ready to dig in again. After all, he’s been there, done that. “Wherever you are [as a leader], you must leverage the [financial] platform. Do an excellent bungee jump if the platform is efficient and robust. If the platform is weak, strengthen it and go for the jump,” he says.
The lack of personal time is the only thing that worries Subramaniakumar. “I don’t want to compromise on my early morning rituals of doing some pranayam, mediation, small exercises, and taking a walk with my dog,” he says with a smile.