Life After Merger

Date:   Friday , February 28, 2003

A YEAR AGO, ICICI WAS JUST ANOTHER BANK, among a pantheon of others in the Indian banking segment. However, one bold move saw the bank being catapulted into the top ranks of banks in the world. When the Reserve Bank of India approved the reverse merger of ICICI with ICICI Bank, not only did it create India’s largest private sector bank, but also paved the way for what might someday become the first global Indian bank.

“It’s not easy to drive the $19.8-billion merged entity when the economy is sluggish. We still have some unfinished agenda on hand. Although the merger has been highly rewarding, it is in a gradual showdown to convert its potential into real monetary values,” says K. V. Kamath, the chairman and managing director of ICICI Bank (NYSE:IBN), who orchestrated the reverse merger with ICICI in March 2002.

What had occupied Kamath’s mind most then was managing the entire retail resource mobilization in such a way that the institution would not end up paying high cost for retail liability; and, coughing up a mandatory investment of $4,166 million in government of India securities as per the Reserve Bank of India guidelines.

“Rustling up huge money—a mandatory investment—to meet the statutory requirements was a tangible challenge. We raised some ourselves and sold-off part of the assets for the rest,” says Kalpana Morparia, executive director of ICICI Bank. At the same time, she had to personally oversee integrating the bank’s different departments into one single entity in a seamless manner, mapping compensation structure and re-creating new organizational hierarchies.

The bank also had to sell some quality paper and resort to high-cost borrowings that were needed to meet liquidity requirements. The result was the twin blow: Lower profits $42 million, and a magnification of the bad assets, much of which has been inherited from the former financial institution. However, Morparia affirms, “In 18 months, that is by September 2004, the bank won’t be talking any longer about my legacy non-productivity assets. We would have reined in our non-productivity liability levels to the international benchmark of 1-2 per cent by then.”

Three-pronged strategy
Soon after the merger, everything seemed to be moving in a most planned manner for a couple of months. But Kamath and his A-team comprising Kalpana Morparia, Hoshang Noshirwan Sinor, ICICI Bank’s managing director, and Lalita Gupte, ICICI’s deputy managing director, felt that there was skill gap so immense that the staff had to be retrained to make them technology savvy. Quickly enough, Kamath chalked out a plan whereby all the employees were compelled to undergo e-learning programs. This met, it launched a large recruitment drive to man new branches.

This required huge spending. Kamath developed a three-pronged strategy—strengthen the recovery arm, sell off assets and mobilize money through deposits. But, as Kamath puts it, it was easier said than done. “We are still pursuing the strategy. These are still the challenges,” he says.

Now, Kamath and his A-team are busy finishing the “unfinished” agenda of increasing the proportion of cross sell to existing customers, mopping up the fee income and exit from pre-merger non-performing loans. In a bid to recover money from the defaults, it recently sent notices to 16 defaulters, 10 of which actually came forward.

“Retail is clearly the way to go, but what should give the debt recovery thrust a shot in the arm is the Securitization Act, which allows banks to now negotiate with lenders on equal terms, and sell assets if they feel the need to do so. We are yet to sharpen the corporate focus. Things will fall in place soon,” says Morparia.

Growth after merger
Today, ICICI Bank services a growing customer base through a multi-channel access network, which includes over 600 branches and extension counters, over 1250 ATMs, call centers and Internet banking. More than 65 percent customers transact on ATMs, 30 percent through call centers and a mere 8 percent use their Internet banking facility. It has a combined customer base of over 15 million banking customers, 2,00,000 credit card holders, 5,00,000 net banking accounts and 9,000 employees, clearly seizing fifth place in the world; its profit after tax for Apr-Dec 2002 was $181 million as compared to $42 million for Apr-Dec 2001, a huge increase of 332 percent.

The bank’s customer assets as of December 31, 2002, were $12,713 million as against $11,985 million at March 31, 2002. But the bank’s corporate assets declined primarily due to sell-down of loans, which Morparia calls a part of the strategy of churning its portfolio and repayments of maturing corporate assets. She concedes that there has been a radical change in business strategy after the merger. “We are now consciously leveraging the distribution architecture to translate into credit exposure. The entire approach is to make a customer-friendly model so as to earn money to maintain profitability,” she quips.

Some time in November last year, Kamath hit upon a novel idea of moving ATMs close to customers without having them to come down all the way to the bank to withdraw cash. The result was ‘ATM on wheels’. He claims it as India’s first mobile ATM in Mumbai. “This is just another step towards maximizing customer convenience through value added services and easy accessibility to our products by leveraging technology,” Morparia says.

Kamath’s rivals at foreign banks like HSBC and Citibank can only wonder at his aggressive moves. HSBC and Citibank could not do what ICICI did in the last one year. The reason is very simple: foreign banks suffer from too little a distribution network. On the other hand, State Bank of India, the (largest) public sector banking giant, suffers from lack of cross multiple channel offerings. So Kamath stands to gain from the disadvantage of foreign and public sector banks.

“What customers want is technology-backed product with a thorough distribution network. We are working our way out to service our non-resident Indians,” he says. When Reserve Bank of India opened gates for private banks to Resident Foreign Currency Account to customers in November last year, the bank took the first step to offer the services. Kamath is now excited about RBI’s approval for ICICI to set up subsidiaries in the United Kingdom and Canada, an offshore branch in Singapore and representative offices in the United Arab Emirates and China. He claims the bank has also received in-principle clearance from RBI for a branch in the Dubai International Financial Center. The 53-year-old Kamath hopes that with all the strategies in place ICICI would be the clear leader and would soon become the first global Indian bank.