The previous evening, private lender Yes Bank’s board was superseded by the Reserve Bank of India (RBI). India’s central bank cited “serious deterioration in the financial position" and imposed a moratorium on the bank, restricting withdrawals to ₹50,000 per depositor.
Yes Bank’s employees at the Lower Parel office, and elsewhere, were jolted. They were unsure of the road ahead—their career prospects. That morning, and for several mornings thereafter, Kumar, who was appointed as the bank’s administrator by the RBI, had many nerves to soothe.
About 13 kilometres away, at the historical business district of Cuffe Parade, a second exercise unfolded. It was led by another former SBI executive, Rakesh Sharma. Appointed as head of IDBI Bank in 2018, he had the tough task of restoring the bank’s past stature as a reliable lender.
Till a few years ago, both the lenders were in deep distress, reeling under the pile up of bad corporate loans and losses. The two banks have now managed to pull themselves out of the hole they dug. While Yes Bank turned profitable after three years in 2021-22, IDBI Bank posted its first full year of profit after five years in 2020-21. Both the lenders have learnt the importance of beefing up their balance sheets with capital.
No doubt, Kumar and Sharma helped script this turnaround. Using their experience from past jobs, they could steer the two lenders to operate within the guardrails of risk management. They learnt the ropes at SBI—while Kumar worked at SBI for over 37 years, Sharma spent over 33 years at the bank. The rescue operations of Yes Bank and IDBI Bank, therefore, underline how well executives are groomed at SBI.
“One must understand that SBI is a semi-public sector institution. It is public sector by ownership but not by culture," said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP, an advisory firm.
“There are 14 circles or regional offices within the bank and each circle is a small bank in itself. They create a cadre where heads of these circles can be potential chief executive officers (CEOs) of mid-sized and small banks," added Parekh.
Take the example of Yes Bank’s Kumar who quickly graduated from being an administrator to being appointed as the bank’s managing director and CEO once the lender’s board was reconstituted. In his last role, he was SBI’s chief financial officer. Previously, he had headed two important business circles—that of Mumbai and Kolkata. For about two years, he was also the deputy managing director of human resources.
“I handled the Mumbai operations of SBI in 2013-14 when its balance sheet in the region was ₹3 trillion, higher than Yes Bank’s balance sheet," said Kumar, seated in his new but sparsely-furnished 9th floor office overlooking the Mumbai airport runway.
Kumar took up the Yes Bank job as a challenge although back then he didn’t really know the extent of the crisis.
How did he go about the job?
The Yes Bank job
Like many executives from public sector companies, Kumar maintains a low-profile. His colleagues say he still wears a Sonata watch, an affordable brand from Titan. For shoes, he prefers Red Chief, a domestic footwear brand belonging to the same group from Kanpur that makes Ghari detergent.
When he walked into Yes Bank’s office in March 2020, he came with a reputation of being a quick decision maker.
“His is one of the cleanest desks I have seen at SBI. He was quick to decide on what to do with a proposal –either approve or decline–instead of dilly-dallying," said a banker who has worked with Kumar. He didn’t want to be identified.
A former SBI executive recalled how Kumar sent him a no-objection certificate for a post-retirement job within seven days, as promised. “His working style is a mix of patience to get things done the right way and an eagerness to get things done fast. Having managed human resources at a bank with close to 250,000 employees, he has interpersonal skills required to motivate and nudge people to excel," he said.
But before he nudged people at Yes Bank to excel, he was also quick to identify the pain points. Credit decisions were often taken by one person without following any due processes, Kumar said. During an interaction with Mint, Kumar, however, refrained from naming Rana Kapoor, the bank’s former promoter.
The bank clearly had several flaws in its risk practices. One, the chief credit officer and the chief risk officer were the same person—the latter’s role is supposed to be more conservative than the former. These roles have now been segregated, Kumar said.
Second, Kapoor used to be part of the bank’s management-level credit committee that looked at loan proposals. Based on the practice at SBI, Kumar has decided to not be part of this committee. Instead, he is part of the board-level credit committee, the final approving authority. “If a CEO is on the same credit committee as the management, others are unable to object to proposals," reasoned Kumar.
The chief executive has also taken other steps to avoid concentration risk. In assets, the bank has decided to set internal exposure limits which are below what RBI allows–20% of the capital base for a single company and 25% for group exposures. Kumar has also nudged the bank to move more towards retail and small business loans.
There was concentration risk on the liability side as well. Yes Bank was heavily dependent on bulk corporate deposits and large government deposits. Kumar has been able to shrink the portfolio of such deposits to ₹10,000 crore now from about ₹50,000 crore when he took over in 2020.
To his credit, two major tasks are nearing completion. The bank is on the cusp of selling 10% each to private equity firms Carlyle and Advent for ₹8,898 crore. That apart, its long-pending plan to transfer ₹48,000 crore of bad loans to an asset reconstruction company (ARC) is in the final stages.
IDBI bank’s rescue act
Rakesh Sharma started his career as a probationary officer at SBI and rose through the ranks. He was also CEO at the erstwhile Lakshmi Vilas Bank and the state-run Canara Bank.
Sharma has a reputation of being a hands-on banker—his former colleagues say that as the CEO of Canara Bank, he called journalists alerting them of important press releases issued by the bank.
His hands-on style has now aided IDBI Bank’s turnaround.
Once a development finance institution, IDBI Bank’s transformation into a full-fledged commercial bank was never quite complete, although it became an universal bank in October 2004. Loans it had given to the infrastructure sector stuck with the bank as chunky exposures and it failed to diversify its book into other less-risky segments, such as retail.
The bad loan cycle that started to unravel around 2014 hit all banks, but many lenders tried to rescue large borrowers by either recasting the toxic loans or adding more to the mix. After the RBI, under former governor Raghuram Rajan, conducted asset quality review in 2015, asking banks to bring parity in classification of some large loans across the system, bad loan numbers of all banks went through the roof. IDBI Bank reported a massive loss of ₹3,665 crore in 2015-16.
The bank was put under RBI’s prompt corrective action (PCA) restrictions between May 2017 and March 2021 that restricted it from corporate lending—the mainstay of the bank back then. In hindsight, IDBI bankers said it was a boon as the bank, pushed to a corner, started growing its retail lending book. At present, 63% of the loan book comprises retail credit as against 45% in the March quarter of 2017-18.
Sharma was appointed managing director and chief executive of the bank in 2018. And in January 2019, the Life Insurance Corp. of India (LIC) purchased a 51% stake in the bank—the capital saved it from sinking. Following the stake sale, IDBI Bank was classified as a private sector bank.
Like Kumar, Sharma put in place stricter risk practices. The bank now has risk classification for various sectors—‘normal’, ‘selective’, ‘cautious’ and ‘highly cautious’. Insiders said that for a sector in the highly cautious category, the bank will not sanction a loan to a corporate rated below A+. Companies rated A+ are the ones with sufficiently strong capability to repay debt.
“Earlier, the good, the bad and the ugly, all had the same exposure limit. Today, even if bankers want to take a higher exposure, policies will not allow it," a banker said on condition of anonymity.
In credit committee meetings, Sharma often asks about the size of a loan the bank is planning for a corporate, a second banker said. He clearly does not want chunky exposures, having learnt a lesson from the bank’s near-death experience in the past.
Besides revamping credit risk policies, the bank cleaned up the balance sheet and restructured the organization in 2019 and 2020, another IDBI Bank executive said. The effort was to drive the business centrally.
For instance, the bank converted many of its businesses into different verticals. Earlier, IDBI Bank’s retail lending department reported to respective zonal heads. Since retail lending is a separate vertical now, the department reports directly to an executive director in the Mumbai head quarters. This is also true for areas such as priority sector loans, mid-corporate credit and the bank’s trade finance vertical.
In 2020, the bank got down to clear a backlog of staff accountability cases, pending for over four years. When large loans turn sour, banks use staff accountability cases to figure out if there were any misconduct by an employee or a group of employees in sanctioning the loans. These cases had slowed down decision making. About 75,000 such cases, pending at various levels, were cleared in 2020. The bank has no case pending for over six months now.
Insiders said that Sharma is now making a concerted push to regain large corporate relationships lost during the PCA days when lending was under tighter control.
Sharma did not speak to Mint for this story.
Future-proof?
A diverse set of issues pulled the two banks down but there was a common thread—unhinged corporate lending, particularly to over-leveraged businesses.
The turnaround is in place and the two executives at the helm of both the banks have done well. Yet, many in the industry advise caution. This is not the time to be complacent—the next round of bad loans could be around the corner—because of the stress that businesses faced during the pandemic months and the subsequent repayment holidays of several months announced by the government. It could be a while though before we know how the revised risk practices, put in place by Kumar and Sharma, hold up.
“IDBI Bank has addressed the asset quality issue. By raising capital and providing for bad loans, the bank has done what it had to. It is time to take advantage of the place it is in," said Asutosh Mishra, head of research (institutional equity) at Ashika Group, a financial services company.
For Yes Bank, long-term capital infusion is important, Mishra added. This could happen through the private equity route and if it does happen, would soothe the nerves of existing shareholders.
They have their eyes on the bank’s next phase.
