The 11th Floor Conference Room in the South Tower at ICICI Bank- Everything Abt c.kochhar

7/31/2019 The 11th Floor Conference Room in the South Tower at ICICI Bank- Everything Abt c.kochhar

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The 11th floor conference room in the South Tower at ICICI Banks headquarters has witnessed

many stormy meetings. Like the one in progress that warm April day in 2008.

KV Kamaths A-team Chanda Kochhar, V Vaidyanathan, Madhabi Puri-Buch, K Ramkumar

and Sonjoy Chatterjee had assembled there, a day before presenting the banks budget to the

board. Kamath had told them they ought to focus on reining in costs.

But a consensus seemed to elude the group. That was because Kochhar, widely tipped to take

over from Kamath, was unconvinced. Everybody else in the room reckoned Rs 7,900 crore in

operating expenses was a fair number.

The debate went on, until abruptly, Kochhar stood up and said: With this kind of numbers, we

wont have a bank to run next year.That said, she called the meeting to a close.

A couple of hours of brainstorming later without Kochhar, they reassembled in the same room.

We dont have an answer, executive director and group HR head at the bank K Ramkumar

recalls the team telling Kochhar. What is the number we ought to be working on? Without

blinking, she said Rs 6,500 crore.

For a few moments, there was a stunned silence in the room. Essentially, she was telling them to

maintain operating expenses at the previous years level. Forpeople working in an entity that

always grew at 35 40 per cent each year, this sounded like hara-kiri. The next day, Kamath

nodded in approval and smiled at the numbers. What in the devils name, they wondered, was

going on? What, indeed!

A new paradigm

For as long as most people who have followed ICICI can remember, the bank has remained

married to one mission: Aggressive growth. That is why when news started trickling out that a

divorce is inevitable, we had to ask Chanda Kochhar who has since taken over from Kamath

as the CEO and managing director, if this is indeed the case. Quite honestly, it was impossible to

miss the firmness in an otherwise temperate voice. Growth, she said, can mean various things.It isnt just about growing the balance sheet.

To seasoned ICICI watchers, this is the kind of language that qualifies for blasphemy the kind

of thing an outsider with no clue of the banks institutional history would say. But then, we all

know Chanda Kocchar is, The Insider. Shes seen it all: How her predecessor KV Kamath

transformed ICICI from a crumbling development financial institution (DFI) to Indias most visible

universal bank; how he grew its balance sheet five fold in less than a decade; and how he

commands fanatic loyalty from the troops. But everything Kochhar is executing right now may

seem to be at loggerheads with what her mentor believed in.

Over the next one year, she intends to grow the balance sheet by just five per cent an

unthinkably low number during the Kamath years. But now, she is battening down the hatches ontwo of Kamaths biggest bets plant the ICICI flag outside India and aggressively woo rural

India. For some time to come, Kochhar promises there will be no saber rattling on either of these

fronts.

And remember the credit card and personal loan businesses? Kamath goaded the bank into war

with global giants Citi and Standard Chartered and eventually toppled them a few years ago. One

of the first things Kochhar did after taking over was to tell her colleagues to back off from these

verticals and cut losses.

Then there was this period when Kamath told a whole generation of Indians why visiting a bank

doesnt make sense. Use ATMs instead, he urged. And to sell a credit-starved country all that a

modern bank could offer, he recruited an army of direct selling agents (DSA).


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It was his way of getting around infrastructural deficiencies that could otherwise hamper ICICIs

growth plans.

Since the time Kochhar has taken over though, the emphasis at ICICI is to get people into

branches.

Folks at the bank used to working at its giant headquarters in Bandra Kurla Complex in Mumbai

are being redeployed to run branches. And 70 percent of ICICIs DSA operations have been

wound up. By next year, the bank may no longer rely on any outsourcing for business acquisition

and collections.

Why, you wonder, is Kamaths protg talking in a tongue different to his? Equally puzzling, why

does Kamath approve of where she is taking the bank to? What changed?

An unfamiliar world

Last September, soon after Lehman Brothers collapsed, ICICI Bank faced an unprecedented

crisis. Speculation mounted that its exposure to Lehman held enough potential to wreck the

whole bank. Edgy traders hammered the stock down and nervous depositors queued up outside

its premises to take their money back. It hurt us enormously when nobody believed our

exposure was limited to $81 million, recalls Ramkumar.

To manage the crisis, a war room was set up and the mantle fell on Kochhar to lead the exercise.

It taught me a coupleof things, she says. One, if there is a challenge, your shoulder ought to

become broader and your back straighter. Confidence is important. Two, you have to be the

sponge that absorbs stress. Else, it passes down to the team and they cannot function

efficiently.

Be that as it may, much agonising and introspection later, the team concluded there were indeed

a few problems on their hands. Mainly, in their attempt to innovate and stay ahead of everybody

else, they had gotten too damn aggressive. Or at least that is how the world perceived them now.

It also sensitised the team to a type of risk they hadnt factored in before reputation risk. Untilthen, as bankers, they had only understood market risk, credit risk and operations risk. In some

part, this was the outcome of yet another controversial sequence of events in the banks history.

Just before this crisis played itself out, the team had battled another.

Starting 2007, the bank came under fire in the media for allegedly using strong arm tactics to

collect credit card dues. We perhaps misjudged the power of public perception around

collections. And that impaired our ability to collect money, says Ramkumar. It finally forced the

board, led by chairman N Vaghul and Kamath to dismantle the entire network of collection

agents.

As a challenger, being seen as aggressive is fine. But the moment you are a leader, being

aggressive is often seen as someone who infringes on other peoples rights. That is not aperception we want to live with, says Ramkumar. To that extent, the team concluded, unbridled

aggression a leitmotif of the Kamath era had to be buried.

While it is tempting therefore to assume all of what ICICI is going through now is a function of the

Kamath-years that would be missing the point entirely. The point is Kamath has this uncanny

knack of seeing things ahead of others. Before anybody else did, he figured that the world was

set to change dramatically.

And that if ICICI had to survive the long haul, it would have to slam the brakes on growth and

reassess the assumptions on which it was built. That it would hurt, was obvious to him. Which is

why, in a signal of solidarity with stakeholders, he declined to accept 300,000 stock options at Rs

400 each, for which he was eligible in December 2008. The team followed suit.


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When he had rolled his sleeves up about ten years ago, Indias 200 million strong middle class

needed credit to buy cars, homes and everything else. The 8-10 percent economic growth gave

them the appetite to go in for big ticket loans. Which is why, by 2007, 65 percent of ICICI Banks

retail assets were meant for this market. The downturn challenged these assumptions. And the

banks existing credit models, built on data from the past,was not tuned in to these changes.

Even as these changes were unfolding, inflation was moving up. In turn, it compelled the central

bank to tighten interest rates. Through all of 2007 and 2008, the RBI pushed up interest rates

repeatedly. For ICICI, that proved disastrous and exposed another chink in its armour an over

reliance on higher cost bulk deposits. Traditionally, most commercial banks monitor a ratio called

CASA. This indicates the percentage of current and savings accounts to total deposits. A higher

CASA ratio means the bank has access to cheaper funds. This allows it to earn higher margins

when it lends.

The problem can be traced back to 2002 when shortly after the reverse merger between ICICI

and ICICI Bank, Kamath realised he had only two options: One, without a branch network to

challenge the might of public sector banks, he could stay content with a niche strategy, much like

foreign banks. Two, he could go for scale by overlooking the CASA ratio in the short term and

focus instead on picking up wholesale deposits at a slightly higher rate. He chose the latter. It

made perfect business sense as well in a low interest rate regime. So, while industry

benchmarks were at 33 per cent (one third of all deposits coming via CASA), ICICI Bank would

touch 30 per cent at the best of times. And when the crisis hit home in October last year and

depositors made a run for their money, CASA levels dropped to an alarming 26 per cent.

And if all of this wasnt enough, the unsecured loans business (largely credit cards and personal

loans) started to bleed. Blame it partly on a bad macro-economic environment. And partly on the

fact that ICICIs collection arms, for reasons described earlier, came under intense public

scrutiny.At Rs. 9,900 crore, of which almost 80 per cent came from the retail business, the badloans gave ICICI a dubious sobriquet: It had the highest NPA levels for any Indian bank.

These numbers drove home another lesson: Unsecured credit is perhaps not the best way to

build customer relationships. Consider HDFC Bank, its fiercest competitor with which it shares an

interesting relationship. When ICICI faced a run on its deposits, Aditya Puri, the MD at HDFC

Bank, sent out an email to his people asking them not to poach or accept deposits from ICICIs

clients until the crisis was over. But that is digressing. The credit card base HDFC Bank caters to

largely comprises customers from its branch banking business. This means, it has access to their

credit history, and therefore they have a decent handle on a customers credit worthiness.

CICI, on the other hand, acquired customers using a network of outsourced agents whose

revenues were linked to the numbers of clients they got in and not their credit worthiness. Notsurprisingly, they threw caution to the wind and up saddled ICICI with customers the bank would

much rather not have. It was a vicious circle. The cost of acquisitions and collections for low

transaction items and small ticket loans was also becoming unsustainable, says Sandeep

Bakshi, deputy MD and retail head at ICICI Bank. Not only did the cost of maintaining the direct

channel jump as volumes grew, but the pressure on collections added to the costs as well.

Simple back-of-the-envelope calculations showed that each time a customer rolled over his credit

card dues, the bank earned a 20 per cent interest. So even with credit losses of around 8

percent, the bank still stood to gain a hefty spread. But very soon, this neat little equation was

turned on its head. Losses began to mount. And a larger number of people began to default on

their dues. It was unsustainable, says Chief Financial Officer N.S. Kannan. All of this wasntapparent initially.


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Through this period, insiders say there was hell to pay. In a sharply competitive culture, the

blame game had begun. And fingers were being pointed at the retail business.

Enter Chanda

Beginning end-January, soon after the board took a call on Chanda Kochhar as Kamaths

successor, she initiated a detailed review of the various businesses the bank is into. And over the

next four months, she started putting a plan into place to build a new template for ICICI that

looked at variables beyond the balance sheet. I knew I had to help people understand the other

dimensions of growth and the logic behind it, she says.

Kamath knew his successor was in for a tough haul and would need the time to settle down and

gain the confidence of the team. Which is perhaps why, two months before he stepped down, he

made sure he came in a half hour late to work and left an hour earlier in the evening. And

immediately after he stepped down as CEO, he took six weeks off from the bank to spend time

with his daughter and grand children in Seattle. It was his way of providing space to the new

leader.

In any case, he had primed Kochhar for the job well in advance. That nod put Kochhars plan to

hold operational expenses at previous years levels firmly in the saddle and stoked a chain of

events over the next couple of months.

Vaidyanathan was given charge of pruning costs on the retail side of the business. Every Friday

evening, about 20 senior managers would brainstorm in his room on how it could be done. The

ground rules were clear. Nothing was sacrosanct. He told them, they could question anything. If

they thought his travel schedule, or that of anybody else, imprudent, it would well be within their

rights to raise the flag and call for a review.

Stopping Blame Game

In July last year, Vaidyanathan and Ramkumar addressed senior managers in the retail

business. For the first time, we stood up and admitted publicly we failed in areas like unsecuredcredit and rural banking, says Ramkumar. We got punished for setting business goals ahead of

capabilities. But as leaders in ICICI Bank, it is okay to stand up and say we are human, that we

dont lack character. It was done without any embarrassment.

Both exercises paid off and blunted the edges off a blame game that could have spiralled out of

control. If any traces remained, the crisis stoked by Lehmans collapse in September buried all

differences. It was the best thing that could have happened, says Ramkumar. The team came

together under Kochhar. The first thing it did was to start pulling out of lending. But more

recently, after she moved to the corner office in May, a fresh team and a new strategy is making

its presence felt.

Take Sonjoy Chatterjee who heads the corporate and international banking business. Until veryrecently, corporate banking relied on fees from large merger and acquisition deals. Inherently

though, this is a lumpy business. When the deal pipeline evaporates, fees follow. To get around

the hump, he added a new dimension: Transaction banking. In other words, for all the major

clients ICICI services, it now manages their non-fund based businesses as well such as forex

requirements and opening letters of credit. In the past, it rarely pitched for such businesses. But

now, it does aggressively. Because what it does is provide a layer of predictability to the income

stream from corporates. Using our clout with large corporate clients, we will actively push for

such business now, says Chatterjee.

In part, this was possible because ICICI has just got the licences to open another 580 branches,

over the 1,453 it already has. Of these, Kochhar has earmarked 20 for special status as mega


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branches. These will serve corporate customers as well. In some ways, this is how Axis Bank,

State Bank of India and HDFC Bank function.

In the past, ICICI preferred to centralise operations while branches were manned by younger

staffers. The outcome was poor turnaround time. The branch staff had little control over the

outcome.

In the new dispensation, a premium is being placed on the branches. Veterans from

headquarters are being deployed to head them. A considerable amount of authority is being

vested on them to solve customer issues at the branch itself. At the same time, the bank is

targeting the government sector, and even stock market participants to open current accounts to

improve the CASA ratio.

The new branch licences are also a reason to wind down the direct marketing channel, a move

that brings with it considerable pain. The channel was built over the years with assiduous wooing

of partners. But now that the relationship has to be terminated, there is angst in the system.

We had to give the better agents sufficient notice, so that they could find alternative

employment, says Ramkumar. Where there was friction, we had to tell them firmly we had no

obligations.

The branches are now the pivot for any retail lending. They are the face of the brand in a

geography. So we need to ensure we get our best people to man them, says Sandeep Bakshi.

As things stand, these branches will take anywhere between 18-36 months to stabilise.

Her biggest challenge is to meet market expectations. So far, to keep its high growth strategy

intact, the bank has had to raise funds from the markets several times. Yet at 7.8 percent, the

return on equity (ROE) has been poor. As a result, its market value took a beating.

In his interactions with analysts, Kannan, the group CFO, has promised an ROE of 15 percent

over the next three years. That will be tough. Kochhar knows that as well and admits she doesnt

know how the numbers will eventually add up. But the roadmap, she says, is clear.Part one of the plan involves pushing through the ambitious branch expansion plan without

adding to operating costs. Which means, in the current fiscal, Kochhar will be focussed on

looking at each item of the profit and loss account and balance sheet; and perhaps restructuring

it. She believes she has the time on her hand to do it right now because credit growth is

moderate. When growth kicks in, which Kochhar reckons will be next year, the bank will be in a

better position to capitalize on it. And finally, in the third phase, focus on unlocking value from

subsidiaries.

There is no alternative, Kochhar says. In a way, these are huge structural changes. But we

have to implement it. I think the actual results of this will not show for a couple of quarters. But I

know from internal reviews we are in the right direction.Kannan says he has built a dashboard for his senior colleagues, which captures the key metrics.

Every fortnight, the performance is reviewed. Any course correction in strategy and tactics are

then implemented quickly. A lot of building blocks are now in place. I am very confident that

people will start seeing the facts a couple of months from now, says Kochhar.

By all accounts, it will be a delicate balancing act. ICICI is hard-wired to be aggressive. Keeping

that instinct at bay will take a lot out of her. Already, public sector banks like SBI are getting

aggressive in the home loan market. In the normal course, ICICI would have been right out there,

slugging it out for the spoils and enjoying a bloody good fight. But these arent normal times at

the bank. For at least three quarters, Kochhar needs to prove to the rest of the world that the

bank can put its house in order, before it can go out there and do what it does best: Fight.

The 11th Floor Conference Room in the South Tower at ICICI Bank- Everything Abt c.kochhar

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