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It is extremely rare for an old-generation private sector Indian bank to buy the assets of a foreign bank. But Ratnakar Bank, which last week announced the purchase of some of Royal Bank of Scotland's India portfolio for an undisclosed amount, could hardly be described as an old-generation bank.
The Kolhapur-based lender, which is also known in the banking circles as the NH4 bank since a majority of its business comes from cities in and around the 1,235-kilometer-long National Highway that connects four of the 10 most populous cities in India from Pune to Chennai, is led by a team of professionals recruited mostly from foreign and other big private banks.
Its chief, Vishwavir Ahuja, is the former CEO of Bank of America's India business; head of strategy and markets, Rajeev Ahuja, joined from Citi, and head of corporate and institutional banking, R Gurumurthy, has worked with Standard Chartered Bank. The senior leadership team also consists of professionals who have worked with Deutsche Bank, Bharti AXA Life Insurance and YES Bank.
The bank is backed by a host of domestic and global investors - HDFC, Norwest Venture Partners, Aditya Birla Private Equity and Samara Capital, to name a few - and is no less aggressive than some of its new-age counterparts.
The transformation since the new management took over has been remarkable. Till a few years ago, the bank was seen as a potential acquisition target. Now, it has become an acquirer itself and has embarked on an aggressive inorganic growth strategy.
Starting a new story
Last week, Ratnakar Bank announced that it was buying Royal Bank of Scotland's business banking, credit cards and mortgage portfolios in India. The move followed RBS's failure to close a deal with Hongkong and Shanghai Banking Corporation (HSBC) to sell these assets after negotiating for almost two-and-a-half years. Axis Bank, YES Bank and IndusInd Bank were also interested in buying the portfolios after RBS and HSBC called off their negotiations, but it was Ratnakar Bank that finally clinched the deal.
The bank believes the transaction will complement its existing businesses and will help it add strength in the desired product and customer segments. The deal will shift over 120,000 RBS India customers to Ratnakar Bank, which currently has 500,000 customers. According to bankers, this will help it improve its brand visibility, something they say is essential for the bank before its listing on the stock exchanges.
The deal, it is learnt, is not capital intensive and is unlikely to stress the financial position of Ratnakar Bank, which has capital adequacy of over 17 per cent (at the end of March 2013) and had raised Rs 324 crore earlier this financial year.
A banker familiar with the developments, on the condition of anonymity, says the transaction suits Ratnakar Bank as it will gain access to the credit card market. While prior to this acquisition Ratnakar Bank did not have a credit card portfolio, RBS had a portfolio of over 89,000 credit cards at the end of June 2013. "The quality of RBS's cards portfolio is not very bad and the pricing made sense, so why not? Sometimes the inorganic route is better than building a business from scratch," the banker says.
The transaction will also help Ratnakar Bank build scale in its existing home loan business. At the end of 2012-13, the private lender's direct loan exposure in residential mortgages was only Rs 67.32 crore.
Niren Shah, managing director, Norwest Venture Partners India, which holds a stake in Ratnakar Bank, believes the long-term prospects of the bank are bright. "With the new management team and vision, we believe the path forward is going to be transformational. Since, we are long-term investors, we are not concerned about short-term returns," he had told Business Standard in an interview earlier.
Another reason to secure the deal was probably the lure of low-cost deposits. RBS's business banking portfolio is believed to have a large number of current-account customers who will now shift to Ratnakar Bank. The lender has been finding it difficult to expand its low-cost current-account and savings-account (CASA) deposits: its CASA ratio fell to 19.7 per cent in 2012-13 from 21.5 per cent a year earlier. It is one of the few banks that are offering more than four per cent interest on savings deposits to attract customers.
To ensure the deal is not disruptive for RBS employees, Ratnakar Bank has decided to absorb all who are associated with the businesses that are being acquired. However, many bankers say the transition will be a challenge, especially as employee unions of old-age private banks tend to resist fresh recruitment. Disparity in pay scales could be another reason for discontent as most RBS employees are likely to come on a higher scale than the employees of Ratnakar Bank. Ahuja had ensured that there was no union unrest when he and his team took charge of the bank in mid-2010; he is hopeful of mirroring that success once more.
In addition to adopting an acquisition strategy, the bank has also drawn up a blueprint for expansion through the organic route with a focus on financial inclusion and rural banking.
"The bank has a legacy. We are very clear that we don't want to change that legacy. The bank is focused on small businesses, traders and the farming community. Its branches are in Maharashtra and in northern Karnataka. We like the middle-class value system, the frugal conservative orientations, the people and their loyalty to the organisation. We believe that the businesses which are being served by the bank provide future opportunities. Financial inclusion is big business now. The very fact that there is going to be a regulatory mandate on top of it has made it even more interesting. We are a strong player in this space and we believe that we can make this as our distinctive appeal," Vishwavir Ahuja had said earlier.
The guiding principle of its future plans will be a strategy called NH4 to NH8. In essence it includes opening new branches in the hinterland along National Highway 8 and increasing its footprint outside of Maharashtra, Karnataka and Goa to the National Capital Region (NCR), Gujarat, Madhya Pradesh, Haryana, Uttar Pradesh, Andhra Pradesh, Rajasthan and Daman & Diu. Some success has already started coming its way. The bank's corporate banking revenue from NCR now accounts for almost a third of its wholesale banking business.
As part of its expansion, the bank opened its first branch in Andhra Pradesh, in Hyderabad, in March and followed it up with a branch in Chennai, its first in Tamil Nadu. The aim is to nearly double the number of branches to 200 and increase ATM centres to 500 by March 2015. Currently, it has 131 branches and 217 ATMs across 11 states.
"What makes the future exciting is the value-creation potential of the transformational exercise currently under way. We believe the management team is capable of building a best of breed, new-age private sector bank. We are confident that all stakeholders-management, board, shareholders and customers-will see the results in a reasonable time frame," says Gopal Jain, founder & managing partner, Gaja Capital Partners, which is also an investor in the bank.
RATNAKAR-RBS: DEAL DESIGN
* Ratnakar Bank to acquire RBS’s business banking, credit card and mortgage portfolios in India
* It will absorb RBS's employees involved in the businesses acquired
* Over 120,000 customers of RBS India will form part of the deal
* The transaction does not involve transfer of RBS’s India branches
